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7 October, 13:37

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? A. 7.17% B. 8.17% C. 11.17% D. 7.33%

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  1. 7 October, 17:04
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    The corerct answer is A. 7.17%.

    One way to solve the problem would be the following:

    First step: Calculate the interests on each loan.

    First National Bank: $1,500,000 * 6% = $90,000

    Banner Bank: $1,000,000 * 9% = $90,000

    Western National Bank: $500,000 * 7% = $35,000

    Second step: Sum all the interests.

    $90,000 + $90,000 + $35,000 = $215,000

    Third step: Use a simple rule of three to determine the weighted average cost of capital.

    r = ($215,000 * 100%) / $3,000,000 = 7.17%
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