6. Solving for the WACC The weighted average cost of capital (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. Consider the case of Turnbull Company: Turnbull Company has a target capital structure of 45% debt, 4% preferred stock, and 51% common equity. It has a before-tax cost of debt of 8.20%, and its cost of preferred stock is 9.30%. If Turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be 12.40%. However, if it is necessary to raise new common equity, it will carry a cost of 14.20%. higher if it has to raise additional common If its current tax rate is 40%, Turnbull's weighted average cost of capital (WACC) will be equity capital by issuing new common stock instead of raising the funds through retained earnings. Turnbull Company is considering a project that requires an initial investment of $270,000.00. The firm will raise the $270,000.00 in capital by issuing $100,000.00 of debt at a before-tax cost of 9.60%, $30,000.00 of preferred stock at a cost of 10.70%, and $140,000.00 of equity at a cost of 13.50%. The firm faces a tax rate of 40%. The WACC for this project is 6. Solving for the WACC The weighted average cost of capital (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. Consider the case of Turnbull Company: Turnbull Company has a target capital structure of 45% debt, 4% preferred stock, and 51% common equity. It has a before-tax cost of debt of 8.20%, and its cost of preferred stock is 9.30%. If Turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be 12.40%. However, if it is necessary to raise new common equity, it will carry a cost of 14.20%. 11.87% ill be higher if it has to raise additional common If its current tax rate is 40%, Turnbull's weighted average cost of capital equity capital by issuing new common stock instead of raising the funds 7.22% tained earnings. 10.32% 8.77% Turnbull Company is considering a project that requires an initial investn $100,000.00 of debt at a before-tax cost of 9.60%, $30,000.00 of prefer 13.50%. The firm faces a tax rate of 40%. The WACC for this project is 0,000.00. The firm will raise the $270,000.00 in capital by issuing at a cost of 10.70%, and $140,000.00 of equity at a cost of 6. Solving for the WACC The weighted average cost of capital (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. 0.78% Consider the case of Turnbull Company: 1.06% Turnbull Company has a target capital structure of 45% debt, 4% preferred stock, and 5 on equity. It has a before-tax cost of debt of 8.20%, and its cost of preferred stock is 9.30%. If Turnbull can raise all of its equity capi 1.20% etained earnings, its cost of common equity will be 12.40%. However, if it is necessary to raise new common equity, it will carry a cost of 14 0.92% higher if it has to raise additional common If its current tax rate is 40%, Turnbull's weighted average cost of capital (WACC) will be equity capital by issuing new common stock instead of raising the funds through retained earnings. Turnbull Company is considering a project that requires an initial investment of $270,000.00. The firm will raise the $270,000.00 in capital by issuing $100,000.00 of debt at a before-tax cost of 9.60%, $30,000.00 of preferred stock at a cost of 10.70%, and $140,000.00 of equity at a cost of 13.50%. The firm faces a tax rate of 40%. The WACC for this project is
