Assignment 10-The Cost of Capital Due Tomorrow at 11 PM PDT The 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. Analyze the cost of capital situations of the following company cases, and answer the specific questions that finance professionals need to address. Consider the case of Turnbull Co. Turnbull Co. has a target capital st cture of 58% debt, 5% preferred stock, and 36% co mon equity. It has a before-tax oost of debt of 8.2%, and its cost of preferred stock is 9.3%. if its current tax rate is 40%, how uch 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 Turnbull can raise all of its equity capitall from retained eamings, its oost ofcommon equity will be 12.4%. However, it will carry a cost of 14.2%. 0.77% o 0.86% o 0.80% 0.64% if it is necessary to raise new common equi ty Turnbull Co. is considering a project that requires an initial investment of $570,0DD. The firm will raise the $57D,0DD in capital by issuing $230,000 of debt at a before-tax oost 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 firm faces a tax rate of 40%. What will be the WACC for this project? Consider the case of Kuhn Co. Kuhn Co. is considering a new project that will require an initial investment of $20 million. It has a target capital st cture of 45% debt, 4% preferred stock, and 51%common equity. Kuhn 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 ield on the company's current bonds is a goad 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 $9 at a price of $92.25 per share. Kuhn does nat 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 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 8.7%, and they face a tax rate of 40%. Determine what Kuhn Company's WACC will be for this project
