Question

Alloy Supply Co. has a new project that will require the company to borrow​ $3,000,000. Acme has made an agreement with three lenders for the needed financing. First National Bank will give​ $1,500,000 and wants​ 6% interest on the loan. Banner Bank will give​ $1,000,000 and wants​ 9% interest on the loan. Western National Bank will give​ $500,000 and wants​ 7% interest on the loan. What is the weighted average cost of capital to acquire the​ $3,000,000?

Answer 1

Answer:

The weighted average cost of capital to raise $3000000 is 7.17%

Explanation:

The weighted average cost of capital to acquire $3000000 is the weighted average of the cost of each financing option that the company will use to raise this amount. The weights of each option is the finance provided by the option divided by the total finance required. thus the weighted average cost of capital is,

Assigning the weights to each loan,

• First National Bank = 1500000 / 3000000 = 1/2
• Banner Bank = 1000000 / 3000000 = 1/3
• Western National Bank = 500000 / 3000000 = 1/6

Weighted average cost of capital = 1/2 * 0.06  +  1/3 * 0.09  +  1/6 * 0.07

Weighted average cost of capital = 0.07166 or 7.166% rounded off to 7.17%