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File Edit View History Bookmarks Iools Help Aplia: Student Question CengageBrain My Home aplia.com/af C Chegg Study Guided Solu APCOA8 01010000002 9ECAF 30000 6. Solving for the WACC Aa Aa 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 case 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 58% debt, If its current tax rate is 40%, how much higher w 6% preferred stock, and 36% 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 earnings, its cost of common equity will be 14.7% O 0.90% However, if it is necessary to raise new common equity, O 1.01% it will carry a cost of 16.8% O 0.75% Turnbull Co. is considering a project that requires an initial investment of $270,000. The firm will raise the $270,000 by befo prefe Consider the case of Kuhn Co. structure of 45% debt, 4% preferred stock, and 51% common equity. Kuhn has noncallable bonds outstanding that The yield on the company's current bonds is a good approximation of the yield on any new bonds that it issues. The ompany can sell shares of preferred stock that pay an annual dividend of $9 at a price of $92.25 per share. common stock to help fund it. Its common stock is currently selling for $33.35 per sh and it is expected to pay a dividend of $2.78 at the end of next year. Flotation costs will represent 8% of the funds raised by issuing new common stock. The company is projected to grow at a constant rate of 9.2%, and they face a tax rate of 40% Determine what Kuhn Company's WACC will be for this project 10.24% 12.05% 9.64% 14.46% 59:27 Timeout

Explanation / Answer

WACC = (Ke*We)+(Kp*Wp)+(Kd*Wd)

= (14.7*0.36)+(12.2*0.06)+(11.1{1-0.40}*0.58)

= 5.292+ 0.732+ 3.8628

= 9.8868

WACC = (Ke*We)+(Kp*Wp)+(Kd*Wd)

= (16.8*0.36)+(12.2*0.06)+(11.1{1-0.40}*0.58)

= 6.048+ 0.732+ 3.8628

= 10.6428

= 0.75

Calculation of WACC

Particulars

Weight

Cost of capital

WACC

Debt

100000/270000

0.3704

10.20(1-0.40)

6.12

2.27

Preferred stock

30000/270000

0.1111

11.4

1.27

Equity

140000/270000

0.5185

14.3

7.41

Total

10.95