ABC Inc borrows money at 90 sells bonds at 60 and the purcha

ABC Inc. borrows money at 9.0%, sells bonds at 6.0%, and the purchasers of common stock require 10.0% 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.

Solution

Cost of capital for borrowed sum = 9 % of 40 million = 3.6 million

Cost of caputal for bond sales = 6 % of 60 million = 3.6 million

Cost of capital for common stock = 10 % of 100 million = 10 million

So inimum return that a company must earn on an existing asset base to satisfy its creditors , bond buyers and common stock holders is sum of all three i.e 17.2 million

And total money from all security holders is 200 million

So WACC = ( 17.2 / 200 ) * 100 = 8.60 %

Intrepretation : That means ABC inc needs at least 8.60 % weighted average cost of capita; to pay on average to all its security holders to finance its assets.