Part 1WACC. Grey's Pharmaceuticals has a new project that will require funding of $4.04.0 million. The company has decided to pursue an all-debt scenario. Grey's has made agreements with four lenders for the needed financing. These lenders will advance the following amounts at the interest rates shown:Click on the following link in order to copy its content into a spreadsheet.[table]
Lender | Amount | Interest Rate Steven | $1,500,0001,500,000 | | 1111% | Yang | $1,200,0001,200,000 | | 99% | Shepherd | $1,000,0001,000,000 | | 77% | Bailey | $300,000300,000 | | 88% |
[/table]What is the weighted average cost of capital for the $4,000,0004,000,000? Part 1What is the weighted average cost of capital for the $4,000,0004,000,000? (Round to two decimal places.)[input]enter your response here %

Question

Part 1WACC. ​Grey's Pharmaceuticals has a new project that will require funding of ​$4.04.0 million. The company has decided to pursue an​ all-debt scenario. ​ Grey's has made agreements with four lenders for the needed financing. These lenders will advance the following amounts at the interest rates​ shown:Click on the following link in order to copy its content into a spreadsheet.[table]
Lender | Amount | Interest Rate Steven | ​$1,500,0001,500,000 |  | 1111​% |  Yang | ​$1,200,0001,200,000 |  | 99​% |  Shepherd | ​$1,000,0001,000,000 |  | 77​% |  Bailey | ​$300,000300,000 |  | 88​% | 
[/table]What is the weighted average cost of capital for the ​$4,000,0004,000,000​? Part 1What is the weighted average cost of capital for the ​$4,000,0004,000,000​? ​(Round to two decimal​ places.)[input]enter your response here ​%

BlackTom AI · Accepted Answer

To evaluate the weighted average cost of capital (WACC) in an all-debt scenario, we only consider the cost of debt since there is no equity financing involved. First, confirm the total financing amount and the individual lenders with their amounts and interest rates. The project requires 4.0 million, funded by four loans: Steven 1.5M at 11%, Yang 1.2M at 9%, Shepherd 1.0M at 7%, and Bailey 0.3M at 8%.

Next, compute the contribution to the total annual interest for each lender by multiplying the amount by its interest rate:
- Steven: 1.5M × 11% = 0.1650M
- Yang: 1.2M × 9% = 0.1080M
- Shepherd: 1.0M × 7% = 0.0700M
- Bailey: 0.3M × 8% = 0.0240M

Sum of all annual interest costs equals 0.1650 + 0.1080 + 0.0700 + 0.0240 = 0.3670M.

Now divide this total annual interest by the total financing amount (4.0M) to obtain the WACC under all-debt financing: 0.3670 / 4.0 = 0.09175, which is 9.175%. Rounding to two decimal places gives 9.18%.

A few checks and clarifications help avoid common pitfalls:
- Ensure you use weights that sum to the total funding (1.5 + 1.2 + 1.0 + 0.3 = 4.0M).
- Use the nominal interest rates as given for each lender; there is no tax shield consideration in the basic WACC calculation unless specified.
- Verify the data hygiene: the table values appear as 11%, 9%, 7%, and 8% for the four lenders, which aligns with typical exam inputs; misreading digits could lead to incorrect results.

If any numbers were misread or if rounding conventions differ (e.g., rounding intermediate steps), the final percentage could shift slightly, but with the provided numbers the result centers around 9.18%.

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(Weighted average cost of capital) Great Minds Inc. has a target capital structure of 45% debt, 35% preferred stock, and 20% common stock. The before-tax costs of debt, preferred stock, and common stock are 7%, 9%, and 15%, respectively. What is Great Mind’s after-tax WACC? Assume a 35% tax rate.

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