Question

Grey Company is a retail trade. The company currently has total capital of USD 50,000,000,000.

Current capital structure of the company:
-Debt Mr. A (7.5% interest) total USD 17,500,000,000
-Debt Mr. B (10% interest) total USD 20,000,000,000
-Debt Mr, C (15% interest) total USD 12,500,000,000

A. Based on the data above, calculate the company's WACC!

B. If the loan interest is 12%, are the funds used as project capital efficient?

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

A B C D E Debt Mr.A Mr.B Mr.C $ $ $ $ Amount 17,500,000,000 20,000,000,000 12,500,000,000 50,000,000,000 Weight 0.35 0.4 0.25 Interest rate 7.50% 10.00% 15.00% A WACC 10.38% Yes, project capital is efficient because wieghted average cost of project capital (WACC) is less than laon interest rate i.e 12%

Cell reference -

DE Debt Interest rate 0.075 Mr.A Mr.B Mr.C Amount 17500000000 20000000000 12500000000 =SUM(C3:05) Weight =C3/$C$6 =C4/$C$6 =C5/$C$6 0.1 0.15 A WACC =SUMPRODUCT(D3:D5, E3:E5) Yes, project capital is efficient because wieghted average cost of project capital (WACC) is less than laon interest rate i.e 12%

Hope this will help, please do comment if you need any further explanation. Your feedback would be appreciated.