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 11.1%, and its cost of preferred stock is 12.2%. If Turnbull can raise alf of its equity copital from retained earnings, its cost of common equity will be 14.7%. Howevec, if it is necessary to raise new common equity, it will carry a cost of 16.8%. If its currint tax rate is 25%, how much higher will Tumbull's weighted average cost of capital (WACC) be if it has to ralse addicienal commen equiry capital by issuing new common stock instead of raising the funds through retained earnings? (Note: Round your intermediate calculations to bevo decimal places.) 1.28% 1.23% 1.07% Turmbull Co. is considering a project that requires an initial investment of $1,708,000, The fimm wul ralse the $1,708,000 in capital by issuing $750,000 of debt at a before-tax cost of 10.2%,578,000 of preferred stock at a cost of 11.4%, and \$880,000 of equity at a cout of 14.3%. The firm faces a tax rate of 25%. What will be the WACC for this project? (Note: Round your intermedigte eslculations to three decimal places.) Consider the case of Kuhn Co. Kuhn Co0, is considering a new project that will require an initial investment of $4 million. It has a target capital structure of 58% debt, 6% preferred stock, and 36% common equity. Kuhn has noncaliable bonds outstanding that mature in five years with af face value of $1,000, an annual coupon rate of 10%, and a market price of $1,050,76. 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 58 at a price of $95.70 per share. Kuhn does not have any retained eamings available to finance this project, so the firm wal have to issue new common atock to halp fund it. fis common stock is currentiy selling for $22.35 per share, and it is expected to pay a dividend of $2.78 at the end of next rear. Flatation costa will represent 3% of the funds raised by issuing new common stock. The company is projected to prow at a constant rate of a. Zhe, and they face a tax rate of 25%. What will be the WACC for this project? (Note: Round your intermediate calculations to tho decimal placis.)
