Ch 10: Assignment - The Cost of Capital more 6. Solving for the WACC Aa Aa E 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, If its current tax rate is 40%, how much higher will 4% preferred stock, and 51% common equity. It has a Turnbull's weighted average cost of capital (WACC) be if before-tax cost of debt of 11.1%, and its cost of it has to raise additional common equity capital by preferred stock is 12.2% Issuing new common stock instead of raising the funds through retained earnings? If Turnbull can raise all of its equity capital from retained O 1.18% earnings, its cost of common equity will be 14.7%. 1.07% However, if it is necessary to raise new common equity, 0.91% it will carry a cost of 16.8%. 1.39% Turnbull Co. is considering a project that requires an initial Investment of $570,000. The firm will raise the $570,000 in capital by issuing $230,000 of debt at a before-tax cost of 11.1%, $20,000 of preferred stock at a cost of 12.2%, and $320,000 of equity at a cost of 14.7%. 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 $45 million. It has a target capital structure of 35% debt, 2% preferred stock, and 63% 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 yield on the 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 $9 at a price of $92.25 per share. carnings, its cost of common equity will be 14.7% However, if it is necessary to raise new common equity, it will carry a cost of 16.8% 1.18% 01.07% 0 0.91% 1.39% Turnbull Co. is considering a project that requires an initial investment of $570,000. The firm will raise the $S70,000 in capital by issuing $230,000 of debt at a before-tax cost of 11.1%, $20,000 of preferred stock at a cost of 12.2%, and $320,000 of equity at a cost of 10.7%. 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 $45 million. It has a target capital structure of 35% debt, 2% preferred stock, and 63% common equity, Kuhn has noncollable bonds outstanding that mature in 15 years with 's 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 yield on any new bonds that it issues. The company consell shares of preferred stock that pay an annual dividend of $9 at a price of $92.25 per share. Kuhn does not have any retained earnings 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 $33.35 per share, and it is expected to pay a dividend of $1.36 at the end of next year. Flotation costs will represent 3% 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, Med Grade It Now Save & Continue Continue without saving