Weighted average cost of capital Personal Finance Problem John Dough has just be

Question

Weighted average cost of capital Personal Finance Problem John Dough has just been awarded his degree in business. He has three education loans outstanding. They all mature in 5 years and can be repaid without penalty any time before maturity. The amounts owed on each loan and the annual interest rate associated with each loan are given in the following table: John can also combine the total of his three debts that is $64,000 and create a consolidated loan from his bank. His bank will charge an annual interest rate of 4.2% 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 port 0101s % Round to two decimal places Data Table (Click on the icon located on the top-right comer of the data table below in order to copy its cantents into a spreadsheet.) Annual interest rate 5.4% 8.4% 4.4% Loan Balance du $25,000 $17,000 $22,000

Explanation / Answer

weight of loan 1 = 25000/64000 = 25/64

weight of loan 2= 17000/64000 = 17/64

weight of loan 3 = 22000/64000 = 11/32

weighted annual rate of portfolio

= 25/64 * 5.4% + 17/64 * 8.4% + 11/32 * 4.4%

= 5.85%

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