Weighted Average Cost of Capital Calculation

What is the current weighted average cost of capital for you?

With a $27000 student loan at 6 percent APR, $17000 car loan at 5 percent APR, and $260000 home loan at 3 percent APR, along with a 12 percent Federal Income Tax bracket, what is the current weighted average cost of capital for you?

Final answer:

The weighted average cost of capital (WACC) for the provided loan amounts and interest rates, considering a 12 percent federal tax bracket, is approximately 2.54%, which is closest to 2.25484%. This is calculated by determining the proportion and cost for each loan, adjusting each APR by the tax rate, then multiplying these and summing up the results.

Explanation:

To calculate the weighted average cost of capital (WACC), we need to first calculate the proportions and costs of each loan, then multiply these and sum them up.

Let's start:

• The total loan amount is $27,000 (student loan) + $17,000 (car loan) + $260,000 (home loan) = $304,000
• The proportion of the student loan is $27,000 / $304,000 = 0.0888
• The proportion of the car loan is $17,000 / $304,000 = 0.0559
• The proportion of the home loan is $260000 / $304,000 = 0.8553

Next, adjust each loan's APR by the tax bracket:

• The student loan's tax adjusted rate is 6% * (1 - 0.12) = 5.28%
• The car loan's tax adjusted rate is 5% * (1 - 0.12) = 4.40%
• The home loan's tax adjusted rate is 3% * (1 - 0.12) = 2.64%

Now, we can calculate the WACC by multiplying the proportions by the tax-adjusted rates and summing these up:

WACC = 0.0888 * 5.28% + 0.0559 * 4.40% + 0.8553 * 2.64% = 2.54%

Thus, the current weighted average cost of capital for you is approximately 2.54%, closest to 2.25484%.