1. Peter Natt owns a small start-up company, and wants to expand his business. In order to do so, he is soliciting capital investments and loans. He has incorporated his company, and plans to issue stock and take out a bank loan in order to finance the expansion. He projects that the funds invested now will produce returns of 10% per year.

Following is information related to the capital sources Peter plans to use.

Common stock issuance: 70% of total funds, investors expect company growth to result in 6% increase in stock value per year

Bank loan: 30% of total funds, requires 18% interest per year

What is the hurdle rate, or weighted cost of capital? (4 points)

Hurdle rate = Weighted Average Cost of Capital: Common Stock: _____% of funds _____% cost = _____% cost Bank Loan: ______% of funds ______% cost = ______% cost