Michigan Manufacturing Inc.(MM)has a new project that will require the company to borrow $1,000,000.MM has made an agreement with three lenders for the needed financing.First National Bank will give $500,000 and wants 9% interest on the loan.Key West Bank will give $300,000 and wants 11% interest on the loan.Chase Bank will give $200,000 and wants 12% interest on the loan.What is the weighted average cost of capital for this $1,000,000?

Question

Quizplus · Accepted Answer

Weighted average cost of capital (WACC) = ($500,000/$1,000,000) x 9% + ($300,000/$1,000,000) x 11% + ($200,000/$1,000,000) x 12% = 0.50 x 0.09 + 0.30 x 0.11 + 0.20 x 0.12 = 0.045 + 0.033 + 0.024 = 0.102 or 10.20%. Therefore, the best choice is B, which is the closest answer to our calculation.