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ABC Inc. borrows money at 9%, sells bonds at 6%, and the purchasers of common stock...

ABC Inc. borrows money at 9%, sells bonds at 6%, and the purchasers of common stock require 9% rate of return. If the company has borrowed $40 million, sold $60 million in bonds, and sold $100 million worth of common stocks, what is the Weighted Average Cost of Capital (WACC)?

Enter the answer as a percentage. For example 12.34% is 12.34. Enter 2 decimal places. Do not enter the percentage symbol.

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Answer #1

ANSWER:

Total amount of finance obtained = loan + bonds + common stock = $40 million + $60 million + $100 million = $200 million

W1 = loan / total amount of finance obtained = $40 / $200 = 0.2 and r1 = 9%

W2 = bonds / total amount of finance obtained = $60 / $200 = 0.3 and r2 = 6%

W3 = common stocks / total amount of finance obtained =$100 / $200 = 0.5 and r3 = 9%

WACC = W1 * R1 + W2 * R2 + W3 * R3

WACC = 0.2 * 9% + 0.3 * 6% + 0.5 * 9%

WACC = 1.8% + 1.8% + 4.5%

WACC = 8.1%

So the wacc is 8.1%

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