Question
In: Finance
Pecking order hypothesis. Rachel can raise capital from the sources in the table: What is Rachel's...
Pecking order hypothesis. Rachel can raise capital from the sources in the table: What is Rachel's weighted average cost of capital if she needs to raise
a. $10,000?
b. $20,000?
c. $30,000?
|
Source of Funds |
Interest Rate |
Borrowing Limit |
|
|
Parents |
2% |
$10,000 |
|
|
Friends |
5.5% |
$3,000 |
|
|
Bank loan |
10% |
$17,000 |
|
|
Credit card |
14.5% |
$5,000 |
Solutions
Expert Solution
a
Cost of capital = interest rate of parents = 2%
b
| Total Capital value = Value of Parents + Value of Friends + Value of Bank loan |
| =10000+3000+7000 |
| =20000 |
| Weight of Parents = Value of Parents/Total Capital Value |
| = 10000/20000 |
| =0.5 |
| Weight of Friends = Value of Friends/Total Capital Value |
| = 3000/20000 |
| =0.15 |
| Weight of Bank loan = Value of Bank loan/Total Capital Value |
| = 7000/20000 |
| =0.35 |
| Cost of Capital = Weight of Parents*Cost of Parents+Weight of Friends*Cost of Friends+Weight of Bank loan*Cost of Bank loan |
| Cost of Capital = 2*0.5+5.5*0.15+10*0.35 |
| Cost of Capital = 5.325 |
c
| Total Capital value = Value of Parents + Value of Friends + Value of Bank loan |
| =10000+3000+17000 |
| =30000 |
| Weight of Parents = Value of Parents/Total Capital Value |
| = 10000/30000 |
| =0.3333 |
| Weight of Friends = Value of Friends/Total Capital Value |
| = 3000/30000 |
| =0.1 |
| Weight of Bank loan = Value of Bank loan/Total Capital Value |
| = 17000/30000 |
| =0.5667 |
| Cost of Capital = Weight of Parents*Cost of Parents+Weight of Friends*Cost of Friends+Weight of Bank loan*Cost of Bank loan |
| Cost of Capital = 2*0.3333+5.5*0.1+10*0.5667 |
| Cost of Capital = 6.8833 |
jeff jeffy answered 2 years agoRelated Solutions
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