A firm's weighted average cost of capitat (WACC) is used as the discount rate to evaluate various capital budgeting projects. However, remember the WACC: is an appropriate discount inte only for a project of average risic. Anatyze the cost of capital situstions of the following company cases, and answer the specific questions that finance professionais need to address. The case of Fuxxy Button Clothing Company Fuzzy Button Ciothing 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 i. 25 , and its cost of preferred stock is 9.3%. If fukzy Button can raise all of its equity capital from retained earningis, its cost of common equity will be 12.4%, However, if it is necessary to faise new common equity, it will carry a cost of 14.24. If its current tax rate is 4094 , how much higher. will furry Buttoos weighted average cost of capital (WACc) be if it has to raise additional common equity capatal by issuing new common stock instead of raising the funds through retained earnings? (Note: Round your answer to bwo decimal places.) 0.794 Q. 8.68 0.834 0,64rin The case of Peacefut abok dinding Company The CFO of Peaceful Book. Banding Compapy is trying to determine the companys WACC. Hin has determined teat the company's before-tax coat of debt is a,70e.. The company currently has $750,000 of debt, and the Cro believes that the bock value of the company's debe is a good apgrokimation The CFO of Peaceful Book Binding Company is trying to determine the company's wACC. He has determined that the company's before-tax cost of debt is 8.70%. The comopsy currently has $750,000 of debt, and the CFO believes that the book value of the company's debt is a good approximation for the market value of the company's debt. - The firm's cost of preferred stock is 9,90%, and the book value of preferred stock is $45,000, - Its cost of equity is 13.20%, and the company currently has $500,000 of conmon equity on is balance sheet. - The cro has eatimated that the firms market value of preferred stock is s78,000, and the markot value of its comman equity is 3860,000 If PBGC is subject to a tax rate of 40%, Pesceful Book Binding Company' wacC is (Hint: Round your answer to two decimal places.) The case of Chilly Moose Fruit Producer Chilly Moose Fruit Producer is considering a new project that will require an initial investment of 545 million. It has a target capital structure of 45% debt, 4% preferred stock; and 51% common equity. Chilly Moose Fruit has noncallable bonds outstanding that mature in 15 years with a face value of $1,000, an annual coupon rate of 11%, and a market price of $1,555.38. The yield on the company's current bonds is a good approximation of the yied on any new bonds that it issues. The company can sell new shares of preferred stock that pay an annual dividend of $8 at a price of $95.70 per share. Assume that Chilly Moose Fruit new preferred shares can be sold without incurring fotation costs. Chilly Moose Fruit does not have any retained earnings avallable 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 $22.35 per share, and it is expected to pay a dividend of $2.78 at the end of next year. Flotation costs will represent 8% of the funds raised by issuing new common stock. The company is projected to grow at a constant rate of 9.2%, and they face a tax rate of 40% Ohily Moose Fruit's WaCc for this project will be: (Hint: Round your answer to two decimal places.) 16.03% 13.40\% 12.73% 10.72%
