Calculate Your Weighted Average Cost of Capital

What is the current weighted average cost of capital based on the provided data?

If you have a $25,000 student loan at 7 percent APR, a $15,000 car loan at 6 percent APR, and a $262,000 home loan at 4 percent APR, what is your current weighted average cost of capital?

Answer:

The current weighted average cost of capital for you is approximately 4.96%. This represents the average interest rate you are paying on your total debt.

Calculating Weighted Average Cost of Capital:

To calculate the weighted average cost of capital, we need to consider the interest rates of each loan and their respective weights. In this case, we have three loans: a student loan, a car loan, and a home loan. First, let's calculate the weights. The weight represents the proportion of each loan in relation to the total debt. The weight is calculated by dividing the loan amount by the total debt.

Weight of student loan: $25,000 / ($25,000 + $15,000 + $262,000) = 0.0735

Weight of car loan: $15,000 / ($25,000 + $15,000 + $262,000) = 0.0441

Weight of home loan: $262,000 / ($25,000 + $15,000 + $262,000) = 0.8824

Next, let's calculate the weighted interest rates. Multiply each loan's interest rate by its weight and sum them up.

Weighted interest rate: (0.0735 * 0.07) + (0.0441 * 0.06) + (0.8824 * 0.04) = 0.0496

Finally, convert the weighted interest rate to a percentage to find the current weighted average cost of capital.

Current weighted average cost of capital: 0.0496 * 100 = 4.96%

By following these calculations, you can determine your weighted average cost of capital based on the interest rates and amounts of your loans.