Question

WACC. Eric has another​ get-rich-quick idea, but needs funding to support it. He chooses an​ all-debt funding scenario. He will borrow ​$4 comma 3114,311 from​ Wendy, who will charge him 66​% on the loan. He will also borrow ​$3 comma 3503,350 from​ Bebe, who will charge him 88​% on the​ loan, and ​$1 comma 3391,339 from​ Shelly, who will charge him 1414​% on the loan. What is the weighted average cost of capital for​ Eric?

Answer 1

Answer:

274.7%

Explanation:

The total amount that Eric will borrow will be = 43114311+33503350+13391339 = 90009000.

Now to calculate WACC, we will apply the WACC formula:

WACC = (43114311/90009000)*0.66 + (33503350/90009000)*0.88 + (13391339/90009000)*14.14

Hence,

WACC = 274.74%

The solution was very simple, we just applied the WACC formula by taking the total amount of debt in the denominator of each of the loans taken and multiplied it by the interest rate on which it is taken.

Hope this helps, although I think the values in the question are not correct, but nonetheless I have provide the correct solution according to the given values.

Thanks.