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 aporopriate 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 profestionais need to address. Consider the case of Turnbull co. Turnbuli Co, has a target capital structure of 58% debe, 6% preferred stock, and 36% common equity. It has a before-tax cost of debt of 11.174 , and its cont of preferred stock is 12.2%. If Tumbult can raise all of its equity capital from retained earnings, its cost of common equity will be 14.7%. However, if it is necessary to raise new commen equity, it wall carry a cost of 16.8%. If its current tax rate is 25%, how much higher will Turnburs weighted average cost of capital (WACC) be if it has to raise additional commen equity captal by issuing new cornmon stock instead of raising the funds through retained earnings? (Note: Round your intermediate calculations to tro decimal places.) 0.76% 1.05% 0.99% 0.675 Tumbuli Co. is considering a project that requires an intial 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 10.2%,530,000 of preferred stock at a cost of 11.4%, and $140,000 of equity at a cost of 14.3%. The firm faces a tax rate of 25%, What will be the WAcC for this project? (Note: Hound vour intermedute calculations to three decimal places.) Consider the case of Turnbula Co. Tumbull Co. has a target capital structure of 58% debt, 6% preferred stock, and 36% comman equity. It has a before-tax cost - of dete of 11.1%, and its cost of preferred stock is 12.2%. If Turnbull can raise all of its equity capital from retained earnings, its cost of common cquity wili be 14,74 . However, if it is necessary to raise new common equity, it will carry a cost of 15.8%. If its current, tax rate is 25%, how much Nigher will Tumbull's weighted average cost of capital (WAcC) be if it has to raste additianal common equity capital by issuing new common stock instead of raising the funds through retained eamings? (Note: found your intermediate calculations to two decimal places.) 0.76% 1.035 0.99% 0.875 Turnbula Co, is considering a project that requires an initial imvestment of $270,000. The firm will raise the $270,000 in capital by issuing $100,000 of debt at a before-tax cost of 10.2%,$30,000 of preferred stock at a cost of 11.4%, and $140,000 of equity at a cost of 14.3%. The firm faces a tax rate of 25%. What will be the Wucc for this project? (Note: Round your intermediate calculations to three decimal places.) Conslder the case of Kuhn Co. Kuhn Co, is considering a new project that wal require an intial investment of $20 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 vears with a face value of $1,000, an annual coupon rate of 11%, and e market price of $1555.38. The vield on the cempan's current bonds is a good approximation of the yield an any new bonds that it issues. The company can sell shares of preferred stock that pay an annual dividend of 59 at a price of $92.25 per share. Kuhn does not have any retained eamings avaliable to finance this project, so the firm will have to iswe new common stock to help fund it. Its common stock is currently seling for $22.35 per share, and it is expected to pay a dividend of $1.35 at the end of rext year. Flotation costs will represent 3% of the funds ralsed by issulng new common stock. The company is projected to grow at a constant rate of 9.2%, and ther face a tax rate of 25%. What will be the WACC for this project? (Note: Found your intermediate calculations to two dedmal places.)
