The WACC is used as the discount rate to evaluate various capital budgeting projects. However, it is important to realize that the WACCThe cost of raising capital through retained earnings is less than grad the cost of raising capital through issuing new common stock.

The cost of equity using the CAPM approach

The current risk$-$free rate of return $(r_{RF})$ is $3\mathrm{.}86\%$ while the market risk premium is $6\mathrm{.}17\%.$ The D'Amico Company has a beta of $0\mathrm{.}92.$ Using the

capital asset pricing model $($CAPM$)$ approach, D'Amico's cost of equity is

The cost of equity using the bond yield plus risk premium approach

The Kennedy Company is closely held and, therefore, cannot generate reliable inputs with which to use the CAPM method for estimating a company's

cost of intemal equity. Kennedy's bonds yield $10\mathrm{.}28\%,$ and the firm's analysts estimate that the firm's risk premium on its stock over its bonds is

$4\mathrm{.}95\%.$ Based on the bond$-$yield$-$plus$-$risk$-$premium approach, Kennedy's cost of internal equity is:

$15\mathrm{.}23\%$

$18\mathrm{.}28\%$

$16\mathrm{.}75\%$

$19\mathrm{.}04\%$

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 $11\mathrm{.}1\%,$ and

its cost of preferred stock is $12\mathrm{.}2\%.$

Ir Turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be $14\mathrm{.}7\%.$ However, if it is necessary to raise new

common equity, it will carry a cost of $16\mathrm{.}8\%.$

If its current tax rate is $25\%,$ how much 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 earnings? $($Note: Round your intermediate calculations to two

decimal places.$)$

$1\mathrm{.}07\%$

$1\mathrm{.}18\%$

$0\mathrm{.}91\%$

$1\mathrm{.}34\%$

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 $10\mathrm{.}2\%,$$$20,000$ of preferred stock at a cost of $11\mathrm{.}4\%,$ and $$320,000$ of equity at a cost of $14\mathrm{.}3\%.$ The firm faces a tax

rate of $25\%.$ What will be the WACC for this project? $11\mathrm{.}51\%$grad $($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 $$20$ million. It has a target capital structure of $58\%$ debt, $6\%$ preferred

stock, and $36\%$ 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 $$1555\mathrm{.}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 $$9$ at a price of $$95\mathrm{.}70$ 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 $$33\mathrm{.}35$ per share, and it is expected to pay a dividend of $$2\mathrm{.}78$ 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 $8\mathrm{.}7\%,$ and they face a tax

rate of $25\%.$ What will be the WACC for this project? $9\mathrm{.}17\%($Note: Round your intermediate calculations to two decimal places.$)$