Larry Co. has $2.3 million of debt, $1.84 million of preferred stock, and $1.85 million of common equity. What would be its weight on debt? 33.79% O 38.40% 27.65% O 24.58% B The weighted average cost of capital (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. Consider the case of Turnbull Company: Turnbull Company has a target capital structure of 58% debt, 6% preferred stock, and 36% common equity. It has a before-tax cost of debt of 8.20%, and its cost of preferred stock is 9.30%. If Tumbull can raise all of its equity capital from retained earnings, its cost of common equity will be 12.40% However, if it is necessary to raise new common equity, it will carry a cost of 14.20%. If its current tax rate is 40%, Tumbull's weighted average cost of capital (WACC) will be capital by issuing new common stock instead of raising the funds through retained earnings. higher if it has to raise additional common equity Turnbull Company is considering a project that requires an initial investment of $270,000.00. The firm will raise the $270,000.00 in capital by issuing $100,000.00 of debt at a before-tax cost of 10.20%, $30,000.00 of preferred stock at a cost of 11.40%, and $140,000.00 of equity at a cost of 14.30%. The firm faces a tax rate of 40%. The WACC for this project is As a company raises more and more funds, the cost of those funds begins to rise. As this occurs, the weighted cost of each new dollar rises. This is called the marginal cost of capital. A graph that shows how the weighted average cost of capital changes as more new capital is raised by the firm is called the MCC (marginal cost of capital) schedule. Use the MCC schedule to complete the sentences that follow. WACC (PERCENT) 120 113 116 114 112 11.0 100 106 104 102 30 40 68 100 120 140 100 New capital raised (S MILLIONS) WACC (PERCENT) 120 11.3 11,6 114 112 11.0 108 10.6 304 10.2 of 20 40 60 00 100 120 140 100 New Capital raised ($ MILLIONS) If this company raises $100M, its weighted average cost of capital is The breakpoints in the MCC schedule occur at of newly raised capital. 4