Assignment 10- The Cost of Capital The WACC is used as the discount rate to evaluete various capital budgeting projects. However, it is important to realize that the WACC Is an appropriate discount rateonly for a project of average risk Analyze the cost of capital situations of the following company cases, and answer the speific questions that finance professionals need to address. Consider the case of Turnbull Co. Turnbull Co. 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 2%, and its cost of preferred stock is 9.3%. If its current tax rate is 40%, how much higher will Turnbull'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 eamings? If Tumbull can raise all of its equity capital from retained earnings, its cost of common equity will be 12.4%. 0 0 64% 0 0 58% 0.54% 0.83% However, if it is necessary to raise new common equity, it will carry a cost of 14.2%. Turnbull Co. is considering a project that requires an initial investment of $570,000. The firm will raise the $570,000 apital by issuing $230,000 of debt at a before-tax cost of 10.2%, $20,000 of preferred stock at a cost of 11.4%, and $320,000 of equity at a cost of 14.3%. The fimm faces a tax rate of 40% what will be the WACC for this project? Consider the case of Kuhn Co. Co. is considering a new project that will require an initial investment of $4 million. It has a target capital structure of 35% debt, 2% preferred stock, and 63% common equity. Kuhn has noncalable bonds outstanding that mature in five years with a face value of $1,000, an annual coupon rate of 1 The yield on the 0%, and a market price of S 1,050 76. 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 at a price of $92.25 per share. retained eamings available to finance this project, so the firm will have to issue new Flotation costs will represent 8% of the funds raised by issuing 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 S1.36 at the end of next year. common stock. The company is projected to grow at a constant Determine what Kuhn Company's WACC will be for this project rate of 8.7%, and they face a tax rate of 40%