Question

WACC. Eric has another​ get-rich-quick idea, but needs funding to support it. He chooses an​ all-debt funding scenario. He will borrow ​$4,596 from​ Wendy, who will charge him 4​% on the loan. He will also borrow ​$4,086 from​ Bebe, who will charge him 6​% on the​ loan, and ​$2,318 from​ Shelly, who will charge him 12​% on the loan. What is the weighted average cost of capital for​ Eric? What is the weighted average cost of capital for​ Eric?

Answer 1

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

=4596+4086+2318

=11000

Weight of Wendy = Value of Wendy/Total Capital Value

= 4596/11000

=0.4178

Weight of Bebe = Value of Bebe/Total Capital Value

= 4086/11000

=0.3715

Weight of Shelly = Value of Shelly/Total Capital Value

= 2318/11000

=0.2107

Cost of Capital = Weight of Wendy*Cost of Wendy+Weight of Bebe*Cost of Bebe+Weight of Shelly*Cost of Shelly

Cost of Capital = 4*0.4178+6*0.3715+12*0.2107

Cost of Capital = 6.4287