Eric has another get-rich-quick idea, but needs funding to support it. he chooses an all-debt funding scenario. he will borrow $2 comma 000 from wendy, who will charge him 6% on the loan. he will also borrow $1 comma 500 from bebe, who will charge him 8% on the loan, and $800 from shelly, who will charge him 14% on the loan. what is the weighted average cost of capital for eric?

Cost of Capital = 8.186

Explanation:

given data

borrow $2,000

charge = 6%

borrow = $1,500

charge = 8%

borrow = $800

charge = 814%

to find out

weighted average cost of capital for Eric

solution

we get first Total Capital value that is

Total Capital value = Value of Wendy + Value of Bebe + Value of Shelly

Total Capital value =$ 2000 + $1500 + $800

Total Capital value = $4300

and

Weight of Wendy will be = Value of Wendy ÷ Total Capital Value

Weight of Wendy =

Weight of Wendy =0.4651  

and

Weight of Bebe will be  = Value of Bebe/Total Capital Value

Weight of Bebe  =

Weight of Bebe  = 0.3488

and

Weight of Shelly will be  = Value of Shelly/Total Capital Value

Weight of Shelly =

Weight of Shelly = 0.186

so

Cost of Capital is here = Weight of Wendy × Cost of Wendy + Weight of Bebe × Cost of Bebe + Weight of Shelly × Cost of Shelly    

put here value

Cost of Capital = 6 × 0.4651 + 8 × 0.3488 + 14 × 0.186

Cost of Capital = 8.186

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