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 percent for the last ten years. What is Sam's weighted average cost of capital?

Question

Quizplus · Accepted Answer

Since Sam is financing the entire building himself by withdrawing from his mutual fund account, which has earned him 13% for the last ten years, his cost of capital is the opportunity cost of withdrawing these funds. This is the return he would otherwise earn if he did not use the funds for the building, which is 13%.

Sam Jones Has an Engineering Firm