Jensen Motorsports has a new project that will require thecompany to borrow $4 million. The...

Jensen Motorsports has a new project that will require the company to borrow $4 million. The company will borrow $1.5 million from Citizens' Bank at 11% interest, $2 million from Philadelphia Bank at 10% interest, and $ 0.5 million from Howard Bank at 13% interest. If you ignore the effect on taxes, what is the weighted average cost of capital for this project?

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Expert Solution

We know that,

WACC = Wc * Rc + Wp*Rp + Wh*Rh

Wc = 1.5 /4 = 0.375 Rc = 11%

Wp = 2 / 4 = 0.5 Rp = 10%

Wh = 0.5/4 = 0.125 Rh = 13%

WACC = 0.375 * 11 + 0.5 * 10 + 0.125 * 13

= 10.75% Answer

jeff jeffy answered 2 years ago

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