Acme 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 10% interest on the loan.Lockup Bank will give $1,000,000 and wants 12% interest on the loan.Southern National 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?

Question

Quizplus · Accepted Answer

To find the weighted average cost of capital (WACC), we need to first calculate the weight of each lender's contribution to the total loan amount:
First National Bank: $1,500,000 / $3,000,000 = 0.50 (50%)
Lockup Bank: $1,000,000 / $3,000,000 = 0.33 (33.33%)
Southern National Bank: $500,000 / $3,000,000 = 0.17 (16.67%)

Next, we find the cost of each lender's contribution by multiplying their weight by their interest rate:
First National Bank: 0.50 x 10% = 5%
Lockup Bank: 0.33 x 12% = 3.96%
Southern National Bank: 0.17 x 13% = 2.21%

Finally, we add up the costs of each lender's contribution to get the WACC:
5% + 3.96% + 2.21% = 11.17%