7. 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 58% debt, 6% preferred stock, and 36% 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 ail of its equity Capital from retained oarnings, 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%. r its current tax rate is 40 o, Turnbul's weighted average cost of capital wACC) wl" be capital by lssuing new common stock instead of raising the funds through retained earnings higher if it has to raise additional common equity Turnbull Company is considering a project that requires an initial investment of $570,000.00. The firm will raise the s570,000.00 in capital by Issuing $230,000.00 of debt at a before-tax cost of 8.70%, s20,000.00 of preferred stock at a cost of 9.90%, and $320,000.00 or equity at a cost of 13.20%. The firm faces a tax rate of 40%. The wACC for this project is Consider the case of Kuhn Corporation Kuhn Corporation is considering a new project that wil, require an initial investment of $20,000,000. It has a target capital structure consisting of 45% debt, 4% preferred stock, and 51% common equity. Kuhn has noncallable bonds outstanding that mature in five years with. face value of $1,000, an annual coupon rate of i0%, and a market price of 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 $570,000.00. The firm will raise the $570,000.00 in capital by lssuing s230,000.00 of debt at a before-tax cost of 8.70%, s20,000.00 of preferred stock at a cost of 9.90%, and $320,000.00 of equity at a cost of 13.20%. The firm faces a tax rate of 40%. The WACC for this project is Consider the case of Kuhn Corporation Kuhn Corporation is considering a new project that I" require an initial investment of S20,000,000. It has a target capital structure consisting of 4596 debt, 4% preferred stock, and 51% common equity. Kuhn has noncallable bonds outstanding that mature in five years with a face value of $1,000, an annual coupon rate of 10%, and a market price of 1,050.76. The yield on the company's current bonds is a good approximation of the yield on any new bonds that it issues. The company can sell shares of preferred stock that pay an annual dividend of $8.00 at a price of $92.25 per share. Kuhn Corporation does not have any retained earnings available to finance this project, so the firm will have to issue new common stock to help fund it. Its common stock is currently selling for $33.35 per share, and it is expected to pay a dividend of $2.78 at the end of next year. Flotation costs wll represent 3.00% of the funds raised by issuing new common stock. The company is projected to grow at a constant rate of 9.20%, and they face a tax rate of 40%. Kuhn Company's WACC for this project will be 7. 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 58% debt, 6% preferred stock, and 36% common equity. it has a before-tax cost of debtof8.20%. 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 w carry a cost of 14.20%. If its current tax rate is 40%. Turnbull's weighted average cost of capital (WACC) will be capital by issuing new common stock instead of raising the funds through retained earni higherit has to raise additional common equity 0.77% Turnbull Company is considering project that requires an initial investment of $570,00 $230,000.00 of debt at a before-tax cost of 8.70%, $20,000.00 of preferred stock at a The firm faces a tax rate of 40%. The WACC for this project is- m will raise the SS 70,000.00 in capital by issu! 0%, and $320,000.00 of equity at a cost of 13.20%. 0.54% 0.64% 0.74% Consider the case of Kuhn Corporation, Kuhn Corporation is considering o new project that will require an initial investment of S20 000,000. It has a target capital structure consisting of 45% debt, 4% preferred stock, and 51% common equity. Kuhn has noncallable bonds outstanding that mature in five years with a roce value of $1.000, an annual coupon rate o, 10%, and a market price of 7. 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 impartant to realize that the WACC is an appropriate discount rate only for a project of average risk Consider the case of Turnbuill Company. Turnbull Company has a target capital structure of 58% debt, 6% preferred stock, and 36% 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 oamngs, its cost of common equity will b12.40%. However, if it is necessary to raise new common equity, it wil carry a cost of 14.20%. If its current tax rate is 40%, Turnbull's weighted average cost of capital (WACC) will be capital by issuing new common stock instead of raising the funds through retained earnings higher if it has to ralse additional common equity urnbull Company is considering a project that requires an initial investment of $570,000.00. The firm will raise the $570,000.00 in capital by issuing $230,000.00 of debt at a before-tax cost of 8.70%, $20,000.00 of preferred stock at a cost of 9.90%, and $320,000.00 of equity at a cost of 13.20%. The firm faces a tax rate of 40%. The WACC for this project is Consider the case of Kuhn Corporation Kuhn Corporation is considering a new project that will require debt, 4% preferred stock, and 51% common equity. Kuhn has noncallable bonds outstanding that mature in five ye 8.35% 9.86% 6.90% nvestment of $20,000,000. It has a target capital structure consisting of 45% . Ifece value of $1,000, an annual coupon rate of 10%, and a market price of capital by iscuing new common stock Instead of raising the funds through retained earnings Turnbull Company is considering a project that requires an initial investment of $570,000.00.The firm will ralse the $570,000.00 in capital by issuing $230,000.00 of debt at a before-tax cost of 8.70%, $20,000.00 of preferred stock at a cost of 9.90%, and S320.000 CO of equity et a cost of 1.20%. The firm faces a tax rate of 40%. The WACC for this project is Consider the case of Kuhn Corporation Kuhn Corporation is considering a new project that will require an initial investment of $20,000,000. It has a target capital structure consisting of 45% debt, 4% preferred stock, and 51% common equty. Kuhn has noncallable bonds outstanding that mature in five years with a face value of $1,000, an annual coupon rate of 10%, and a market price of 3,050.76. The yield on the company's current bonds is a good approximation of the yield on any new bonds that it issues The company can sell shares of preferred stoc annual dividend of s8.00 at a price of $92.25 per share 11.67% Kuhn Corporation does not have any retained it. Its common stock is currently selling for $ represent 3.00% of the funds raised by issuin tax rate of 40%. blable to finance this project, so the firm will heve to lesue new common stock to help fund are, and it is expected to pay a dividend of $2.70 at the end of next year Flotation costs wil non stock. The company is projected to grow at a constant rate of 9,20%, and they face a 12.84% 12.25% Kuhn Company's wACC for this project will be