Jensen Motorsports has a new project that will require the company to borrow $3,000,000. Jensen's has made an agreement with three lenders for the needed financing. Citizens' Bank will give $1,500,000 and wants 10% interest on the loan. Visitors' Bank will give $1,000,000 and wants 12% interest on the loan. Peoples' Bank will give $500,000 and wants 13% interest on the loan. What is the weighted average cost of capital for this $3,000,000?
A) 10.55%
B) 11.17%
C) 11.66%
D) 12.16%

Question

Quizplus · Accepted Answer

The weighted average cost of capital (WACC) is calculated by taking the sum of the products of each loan's proportion of the total loan amount and its interest rate. For Jensen Motorsports:  - Citizens' Bank: ($1,500,000 / $3,000,000) * 10% = 5%  - Visitors' Bank: ($1,000,000 / $3,000,000) * 12% = 4%  - Peoples' Bank: ($500,000 / $3,000,000) * 13% = 2.17%  Adding these gives a WACC of 11.17%.

Jensen Motorsports Has a New Project That Will Require the Company