Scenario 13-5
Suppose that Emily opens a restaurant. She receives a loan from a bank for $200,000. She withdraws $100,000 from her personal savings account. The interest rate on the loan is 6%, and the interest rate on her savings account is 2%.
-Refer to Scenario 13-5. Emily's explicit cost of capital is
A) $2,000.
B) $4,000.
C) $12,000.
D) $14,000.

Question

Quizplus · Accepted Answer

Emily's explicit cost of capital is the cost of borrowing money from the bank, which is 6% of the $200,000 loan, or $12,000. She also has an opportunity cost of using her personal savings account, which is the amount of interest she could have earned if she didn't withdraw the $100,000. At a 2% interest rate, the opportunity cost is $2,000. Therefore, her total explicit cost of capital is $12,000 + $2,000 = $14,000. The best choice is C.

Scenario 13-5 Suppose That Emily Opens a Restaurant. She Receives a Loan