Question

Eric has another​ get-rich-quick idea, but needs funding to support it. He chooses an​ all-debt funding scenario. He will borrow ​$2 comma 000 from​ Wendy, who will charge him 6​% on the loan. He will also borrow ​$1 comma 500 from​ Bebe, who will charge him 8​% on the​ loan, and ​$800 from​ Shelly, who will charge him 14​% on the loan. What is the weighted average cost of capital for​ Eric?

Answer 1

Answer:

Cost of Capital = 8.186

Explanation:

given data

borrow ​$2,000

charge = 6​%

borrow = ​$1,500

charge = 8​%

borrow = ​$800

charge = 814%

to find out

weighted average cost of capital for​ Eric

solution

we get first Total Capital value that is

Total Capital value = Value of Wendy + Value of Bebe + Value of Shelly

Total Capital value =$ 2000 + $1500 + $800

Total Capital value = $4300

and

Weight of Wendy will be = Value of Wendy ÷ Total Capital Value

Weight of Wendy = $\frac{2000}{4300}$

Weight of Wendy =0.4651  

and

Weight of Bebe will be  = Value of Bebe/Total Capital Value

Weight of Bebe  = $\frac{1500}{4300}$

Weight of Bebe  = 0.3488

and

Weight of Shelly will be  = Value of Shelly/Total Capital Value

Weight of Shelly = $\frac{800}{4300}$

Weight of Shelly = 0.186

so

Cost of Capital is here = Weight of Wendy × Cost of Wendy + Weight of Bebe × Cost of Bebe + Weight of Shelly × Cost of Shelly    

put here value

Cost of Capital = 6 × 0.4651 + 8 × 0.3488 + 14 × 0.186

Cost of Capital = 8.186