please solve completely and correctly all questions thanks mayest- 006&ck;= m, 1
ID: 2779964 • Letter: P
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please solve completely and correctly all questions thanks
mayest- 006&ck;= m, 1 50967405 5849-0AA05 , I C Search 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 its a ment tax rate is 40%, how much higher will Turnbull's weighted average ast or capital (WACC) be if it has to raise additional common equity capital by issuing new cornmon stock instead of raising the funds through retained earnings? If Tunbull can raise all of its equity capital from retained earnings, its cost of cornmon equity will be 14,7%. However, if it is necessary to itwill carry a cost of 16.8%. o 1.34% o 1.44% 1.07% Q 1.39% rais new common equity, Turnbull Co. is considering a project that requires an initial investment of $1,70B,000. The firm will raise the $1,708,000 in capital by issuing $750,000 of debt at a before-tax cost of 96%, $78,000 of prefered stock at a cost of 10.7%, and $880,000 of equity at a cost of 13.5% The firm, faces a tax rate of 40%. What wil be the WACC for this project? Consider the case of Kuhn Co. Kuhn Co. is considering a new project that will require an initial investment of $45 million. It has a target capital structure of 4S96 debt, 4% preferred stock, and 51% common equity. Kuhn has noncallable bonds outstanding that mature in 15 years with o face value of $1,000, an annual coupon rate of 11%, and a market price of S,S55.38. 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 $8 at a price of $92.25 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 $33.35 per share, and it is expected to pay a dividend of s2.78 at the end of next year. Flotation costs will represent aP% of the funds raised by issuing new common stock The company is projected to grow at a constant rate of 8.7% and they tace a tax rate o 40% Determine what Kuhn Company's WACC will be for this projectExplanation / Answer
Answer:
Increase in WACC would be because of the change in cost of capital because of issuing new common stock instead of going for retained earnings
WACC = r(E) × w(E) + r(D) × (1 – t) × w(D) + w(P) * r(P)
increase in WACC= weight of equity * (Increase in cost of equity )
we do not have to think about rest ( cost of debt & cost of preferred stock ) as their cost of capital would remian same
we = 51%
Cost of equity before = 14.7%
Cost of equity after = 16.8%
Incease in cost of capital = 0.51*(16.8%- 14.7%) = 1.071%
Answer is C
B. using the wacc equation
WACC = r(E) × w(E) + r(D) × (1 – t) × w(D) + w(P) * r(P)
total investment = $1708000
weightof debt = 750000/1708000 = 0.43911
weight of preffered stock = 78000/1708000 =0.045667
weight of equity ( common tock) = 880000/1708000= 0.515
putting these value in the equation
wacc = 0.43911*9.6*(1-0.4) + 0.045667 * (10.7%) + 0.515 *13.5%
wacc = 9.9704%
Answer : first find the cost of debt = rD
15 = n ( years to maturity)
1000 = FV
-1,555.38 = PV
10% = coupon rate
110 = PMT
YTM = 5.48%
use the rate function given in the excel to calcultae YTM
It will come become cost of debt
equity cost of capital
using CGDDM to calculate
re = dividend /share price ( 1- floation cost) + future growth rate
rE= (2.78/33.35(1-0.08) )*100 + 8.7% = 17.76%
Cost of preffered stock = dividend / price of preffered share = 8/92.25 *100 = 8.67%
WACC = r(E) × w(E) + r(D) × (1 – t) × w(D) + w(P) * r(P)
WACC = 0.51*17.76% + 0.45 * 5.48% (1-0.4) + 0.04*8.67%
WACC = 10.88%
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