Question

Weighted average cost of capital  Personal Finance Problem   John Dough has just been awarded his degree in business. He has three education loans outstanding. They all mature in 5 years and he can repay them without penalty any time before maturity. The amounts owed on each loan and the annual interest rate associated with each loan are given in the following​ table: LOADING..

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in order to copy the contents of the data table below into a​ spreadsheet.)

Loan	Balance due		Annual interest rate
1	​$24 comma 00024,000		4.64.6​%
2	​$8 comma 0008,000		7.67.6​%
3	​$32 comma 00032,000		3.63.6​%

.. John can also combine the total of his three debts​ (that is,​ $64,000) and create a consolidated loan from his bank. His bank will charge an annual interest rate of 4.1 % for a period of 5 years. Should John do nothing​ (leave the three individual loans as​ is) or create a consolidated loan​ (the $64,000​ question)? The weighted average annual interest rate on​ John's current loan portfolio is nothing​%. ​(Round to two decimal​ places.)

Answer 1

Solution :

Weighted average cost of loan = (Interest on loan 1 + Interest on Loan 2 + Interest on loan 3) / Total amount  

Weighted average cost of loan = (24000 * 4.64% + 8000 * 7.67% + 32000*3.63%) / 64000

Weighted average cost of loan = (1113.6 + 613.6 + 1161.6) / 64000 = 2888.8 / 64000 = 4.51%

Now John can take a combine loan of 64,000 at the interest rate of 4.1% while the current average cost of loan is 4.51% hence he should take the combine loan.

Weighted cost of loan = 4.51%