6. Solving for the WACC The WACC is used as the discount rate to evaluate various capital budgeting projects. However, it is important to realize that the WaCc is an appropriate discount rate only for a project of average risk. Analyze the cost of capital situations of the following company cases, and answer the specilic questions that finance professionals need to address. Consider the case of Turnbull Co. Tumbuli Co, has a target capital structure of 5BW debt, 6% preferred stock, and 36% common equity, it has a before-tax cost of debt of 8.2%6, and its cost of preferred stock is 9.3%. If Tumbul can raise all of its equity capital from retained eamings, its cost of common equity will be 12.4\%. However, if it is necessary to raise new common equity, it will carry a cost ot 14.2%. If its current tax rate is 25\%, how much higher will Tumbuils weighted average coat of capital (Wacc) be if it has to raise adoitional comman equity capital by issuing new common stock instead of raising the funds throvgh retained earnings? (Note: Round your intermediate caiculations to two decimal places.) 0.75% 0.65% 0.88% 0.78% 0.75% 0.65% 0.88% 0.78% Turnbull Co. is considering a project that requires an initial investment of $270,000. The firm will raise the $270,000 in capital by issuing $100,000 of debt at a before-tax cost of 8.7%,$30,000 of preferred stock at a cost of 9.9%, and $140,000 of equity at a cost of 13.2%. The firm faces a tax fate of 25%. What will be the WACC for this project? (Note: Round your intermediate calculations to three decimal places.) Consider the case of Kuhn Co. Kuhn Co. is considening a new project that will require an initial investment of $20 milion. it has a target capital structure of 35% debt, 2 . preferred 5tock, and 63% common equity. Kuhn has noncallable bonds outstanding that mature in 15 years with a face value of $1, ooo, an annual coupon rate of 11%, and a market price of \$1555, 38. The yield on the company's current bonds is a good approximation of the yield an any new bonds that it issues. The company can sell shares of preferred stock that pay an annual cividend of $9 at a price of $95.70 per share. Kuhn does not have any retained earnings available to finarice this proyect, so the firm will have to issue new common stock to help fund it. Its common stock is cumently selling for $33.35 per share, and it is expected to pay a dividend of 51.36 at the end of next year. Flotation costs will represent 3% of the funds raised by issuing new common stock. The company is projected to grow at a constant rate of 8.74 , and they face a tix rate of 25%. What will be the wace for this project? (Note: Round your intermediate calculations to two decimal places.)
