Question

Dakota Drilling Inc. (DD) has a new project that will require the company to borrow $5,000,000. MM has made an agreement with three lenders for the needed financing. First National Bank will give $1,000,000 and wants 6% interest on the loan. Texas Bank will give $3,000,000 and wants 7% interest on the loan. Chase Bank will give $1,000,000 and wants 8% interest on the loan. What is the weighted average cost of capital for this $5,000,000?

Answer 1

Based on the information given, the weighted average cost of capital for this $5,000,000 will be 7%.

What is weighted average cost of capital?

The weighted average cost of capital simply means the rate that a company is expected to pay the security holders in order to finance its assets.

Based on the calculation in the table, the weighted average cost will be:

= 1.20% + 4.20% + 1.60%

= 7.00%

In conclusion, the correct option is 7.00%.

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