Sam Jones has an engineering firm.He wants to build a new headquarters building.The building will cost $1,500,000.He will finance the entire building himself,even though bank financing is at prime plus 2 percent.The prime lending rate is currently 8.5 percent.Sam will withdraw the money for the building from his mutual fund account where he has earned 13% for the last ten years.What is Sam's weighted average cost of capital?

Question

Quizplus · Accepted Answer

Sam's weighted average cost of capital is the opportunity cost of using his own funds, which is the return he is foregoing from his mutual fund account, i.e., 13%.

Sam Jones Has an Engineering Firm