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Ch 10: Assignment - The Cost of Capital Q Search this 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 structure of 45% debt, 4% preferred stock, and 51% common equity. It has a before-tax cost of debt of 8.2%, and is cost of preferred stock is 9.3%. If Turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be 12.4%. However, if it is necessary to raise new common equity, it will carry a cost of 14.29 If its current tax rate is 25%, how much higher will Turnbull's weighted average cost of capitat (WACC) be it has to raise additional common avity capital by issuing new common stock instead of raising the funds through retained earnings? (Note: Round your intermediate calculations to two decimal places. 1.159 0.929 1.109 0.839 1001 ASF Mostly doudy 1933142283850270183229535&SN 9781337911 CENGAGE MINDTAP e 3 Ch 10: Assignment - The Cost of Capital Search this cours O 1.10% 0.83% Turnbull Co. is considering a project that requires an initial investment of $270,000. The firm will raise the $270,000 in capital by issuing $100,000 of debt at a before-tax cost of 8.7%, $30,000 of preferred stock at a cost of 9.9%, and $340,000 of equity at a cost of 13.2%. The firm faces a tax rate of 25%. What will be the WACC for this project? (Note: Round your intermediate calculations to three decimal places) Consider the case of Kuhn Co. Kuhn Co. is considering a new project that will require an initial investment of 545 million. It has a tarot capital structure of 39% debe 2 preferred stock, and 63% common equilty. Kuhn has noncallable bonds outstanding that mature in 15 years with a face value of $1.000, an annual coupon rate of 115, and a market price of $1555.38. The yield on the company's current boods 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 $95.70 per share. Kuhn does not have any retained earnings available to finance this project, so the firm will have to issue rew.common stack 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 prow at a constart rate of 0,2%, and they face a tax rate of 259. What will be the WACC for this project? (Note: Round your intermediate calculations to two decimal places) Grade it Now Save & Continue Microsoft Onroe Continua Ch 10: Assignment - The Cost of Capital Q Search this 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 structure of 45% debt, 4% preferred stock, and 51% common equity. It has a before-tax cost of debt of 8.2%, and is cost of preferred stock is 9.3%. If Turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be 12.4%. However, if it is necessary to raise new common equity, it will carry a cost of 14.29 If its current tax rate is 25%, how much higher will Turnbull's weighted average cost of capitat (WACC) be it has to raise additional common avity capital by issuing new common stock instead of raising the funds through retained earnings? (Note: Round your intermediate calculations to two decimal places. 1.159 0.929 1.109 0.839 1001 ASF Mostly doudy 1933142283850270183229535&SN 9781337911 CENGAGE MINDTAP e 3 Ch 10: Assignment - The Cost of Capital Search this cours O 1.10% 0.83% Turnbull Co. is considering a project that requires an initial investment of $270,000. The firm will raise the $270,000 in capital by issuing $100,000 of debt at a before-tax cost of 8.7%, $30,000 of preferred stock at a cost of 9.9%, and $340,000 of equity at a cost of 13.2%. The firm faces a tax rate of 25%. What will be the WACC for this project? (Note: Round your intermediate calculations to three decimal places) Consider the case of Kuhn Co. Kuhn Co. is considering a new project that will require an initial investment of 545 million. It has a tarot capital structure of 39% debe 2 preferred stock, and 63% common equilty. Kuhn has noncallable bonds outstanding that mature in 15 years with a face value of $1.000, an annual coupon rate of 115, and a market price of $1555.38. The yield on the company's current boods 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 $95.70 per share. Kuhn does not have any retained earnings available to finance this project, so the firm will have to issue rew.common stack 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 prow at a constart rate of 0,2%, and they face a tax rate of 259. What will be the WACC for this project? (Note: Round your intermediate calculations to two decimal places) Grade it Now Save & Continue Microsoft Onroe Continua