Question

11 of 11 (5 complete) HW Score: 41 82%, 46 of 11 pts P9-18 (similar to) Question Help Weighted average cost of capital Personal Finance Problem John Dough has just been awarded his degree in business. He has three education and outstanding. They all mature in 5 years and he can repay them without penalty any time before maturity. The amounts owed on each loan and the annual interest associated with each loan are given in the following table: John can also combine the total of his three debts (that is, 564,000) and create a consolidated loan from his bank. His bank will charge an annual interest rate of 50% for a period of 5 years. Should John do nothing leave the three individual loans as is) or create a consolidated loan (the $64.000 question? The weighted average annual interest rate on John's current loan portfolio is % (Round to two decimal places) Enter your answer in the answer box and then click Check Answer Clear All 1 part I remaining This course (FINA 3313 Spring 2020 Thompson) is based on Zutter/Smart: Principles of Managerial Finance Brie de Terms of use Pro Con 2 020 Ronson Education Google Driv e - to search wo

Answer 1

Weighted average rate of interest is calculated as follows:

Loan	Balance Due	Annual interest rate	Weights	Weighted return
1	24000	4.300%	24000/64000 x 100= 37.500%	37.5% x 4.3 = 1.613%
2	14000	7.300%	14000/64000 x 100=21.875%	21.875% x 7.3= 1.597%
3	26000	3.300%	26000/64000 x 100=40.625%	40.625% x 3.3 = 1.341%
	24000+14000+26000 = 64000		37.5+21.875+40.625 = 100.00%	1.613+1.597+1.641 = 4.55%

It is better to keep the existing loans as the are because the weighted average interest rate is lower that 5% as suggested by the combined loan