a. Solving for a irm's WACC frts weightbd average cost of capital (WACC) is uBed as the discount rate to evaluate varlous capital budgeting projecds. However, remember the WACC is an approgriate discount rate only for a project of uverage risk Analyze the cost of aapital situations of the following company cases, and answer the specific questions that finance professionals need to address Consider the case of Cold Goose Metal Works Cold Coose Metal works has a target apital structure of 58% debt, 6% preferred stock, and 36% oommon equity. It has a before-tax cost of debt of 11.1%, and itscost of preferred stock is 122%. if its arrent tax rate is 40%, to, much higher will Cold Goose's weighted average cost of capital (WACC) be if it has to raise additional common equity capital by issuing new common stock instead of raising the funds through retained earnings? If cold Goose can raise all of its equity capital from retained eamings, its cost of comman equity will be 14.7%. However, if it is necessary to raise new common equity, i 0 0.90% 0.98% 0.75% O 0.94% will carry a cost of 16.8%. Consider the case of Red Oyster Seafood Company The CFO of Red Oyster Seafood Company is trying to determine the company's WACC. He has determined that the company's before-tax cost of debt is 11.10%. The company currently has $100,000 of debt, and he 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 oost of preferred stock is 12.20%, and the book value of preferred stock is sin, soo. Its cost of equity is 14. 70%, and the company currentiy has $85,000 of common equity on its balance sheet. The CFO has estimated that the firm's market value of preferred stock is $30, 000, and the market value of its common equity is $140,000. . . If Red Oyster is subject to a tax rate of 40%, Red Oyster Seafood Company's WACC is Consider the case of Green Penguin Pencil Company Green Penguin Pendl Company is considering a new project that will require an initial investment of s20 million. It has a target capital structure of 35% debt, 2% preferred stock, and 63%common equity. Green re gun Penal has noncalable bonds outstanding that mature in five yens with a face value of S 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 sel new shares of preferred stock that pay an annual dividend of sa at a price of $95.70 per share. Assume that Green Penguin Pencil new preferred shares can be sold without incurring Actation costs Green Penguin Penail does not have any retained eamings available to finance this project, so the firm will have to issue new common stock to help fund it. Its common stock is currenty seling for $22.35 per share, and it is expected to pay a dividend of $1.36 at the end of next year. Flotation costs will represent a% of the funds rased by issuing new common stock. The company is projected to grow at a constant rete of ,7%, and they face a tax rate of 40%. Green Penguin Pencil's WACC for this project will be: O 11.64% O 12.80% 10.48 O s.31% a. Solving for a irm's WACC frts weightbd average cost of capital (WACC) is uBed as the discount rate to evaluate varlous capital budgeting projecds. However, remember the WACC is an approgriate discount rate only for a project of uverage risk Analyze the cost of aapital situations of the following company cases, and answer the specific questions that finance professionals need to address Consider the case of Cold Goose Metal Works Cold Coose Metal works has a target apital structure of 58% debt, 6% preferred stock, and 36% oommon equity. It has a before-tax cost of debt of 11.1%, and itscost of preferred stock is 122%. if its arrent tax rate is 40%, to, much higher will Cold Goose's weighted average cost of capital (WACC) be if it has to raise additional common equity capital by issuing new common stock instead of raising the funds through retained earnings? If cold Goose can raise all of its equity capital from retained eamings, its cost of comman equity will be 14.7%. However, if it is necessary to raise new common equity, i 0 0.90% 0.98% 0.75% O 0.94% will carry a cost of 16.8%. Consider the case of Red Oyster Seafood Company The CFO of Red Oyster Seafood Company is trying to determine the company's WACC. He has determined that the company's before-tax cost of debt is 11.10%. The company currently has $100,000 of debt, and he 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 oost of preferred stock is 12.20%, and the book value of preferred stock is sin, soo. Its cost of equity is 14. 70%, and the company currentiy has $85,000 of common equity on its balance sheet. The CFO has estimated that the firm's market value of preferred stock is $30, 000, and the market value of its common equity is $140,000. . . If Red Oyster is subject to a tax rate of 40%, Red Oyster Seafood Company's WACC is Consider the case of Green Penguin Pencil Company Green Penguin Pendl Company is considering a new project that will require an initial investment of s20 million. It has a target capital structure of 35% debt, 2% preferred stock, and 63%common equity. Green re gun Penal has noncalable bonds outstanding that mature in five yens with a face value of S 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 sel new shares of preferred stock that pay an annual dividend of sa at a price of $95.70 per share. Assume that Green Penguin Pencil new preferred shares can be sold without incurring Actation costs Green Penguin Penail does not have any retained eamings available to finance this project, so the firm will have to issue new common stock to help fund it. Its common stock is currenty seling for $22.35 per share, and it is expected to pay a dividend of $1.36 at the end of next year. Flotation costs will represent a% of the funds rased by issuing new common stock. The company is projected to grow at a constant rete of ,7%, and they face a tax rate of 40%. Green Penguin Pencil's WACC for this project will be: O 11.64% O 12.80% 10.48 O s.31%