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

Answer 1

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%