6. Solving for the WACC The WACC is used as the discount rate to evaluate qarious capital budgeting projects. However, it is impertant to realire that the WacC is an appropriate discount rate only for a project of average risk: Analyre the cost of capital situations of the following company cases, and answer the specinc questions that finance professionals need to sdiress. Consider the case of Turnbull Col Turnbull Co. has a target capital structure of 45 W debt, 4\% preferred stock, and 51% common equity. It has a before-tax cost of debt of 11,1%, and its cost of preferred stock is 1224 . If Turnbull can raise all of its equity capital from retained carnings, its cost of common equity will be 14.7 . Ho. However, if it is necossary to ralise new common equity, it will carry a cost of 15.8% If its current tax fate is 25%, how much higher will Turnbully weighted average cost of capital (WhcC) be if it has to raise sddsional cornmon equity capital by issuing neee commen stock instead of ralsing the funds through retained earrings? (Note: Round your intermediate calculations ko two decimal placesi) 1,735 1. 44% 1.974 Tumbuli co. is considering a project that requires an initial investment of $570,000. The tirm will raise the $570,000 in capital by issuing $230,000 of debt at a before-tax cost of 8.7%,$20,000 of preferred stock at a cost of 9.9%, and 5320,000 of equity at a cost of 13.2%. The firm faces a tax rate of 2.54 . 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 considering a new project that will require an initial investment of 520 miltion. it has a target eapital structure of 35% debt, 2% preferred stock, and 63% common equity. Kuth has noncaliabie bonds outstanding that mature in 15 years with a face value of s1,000, an annual coupon rate of 11W, and a market peice of 31555,30 . The yield on the compariv's current bonds is a good approximation of the yield on any now bonds that it issues. The compacry can seil shares of preferred stock that poy an annual dividend of $9 at a price of $95.70 per share. Kuhn does not have any retained earnings avaliable to finance this project, so the firm will have to issue new common steck to help fund it. Its cammae stock is cuarrenty seling for 533.35 per share, and it is expected to pay a divldend of 32.78 ot the end of next year. Flotation costs will regretent 35 of the funds raised by issuing new common stock. The company is projected to grow at a constant rate of 9.246 , and they face a tak rate of 25 . Whet will be the Wace for this project? (Note: Round your intermediate calcuiations to two decimal places.)
