I need a step by step solution for all 3 questions. Thank you. i Chrome File Edi

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I need a step by step solution for all 3 questions. Thank you.

i Chrome File Edit View History Bookmarks People Window Help 2 ) dij 22% C%), Fri 3:41 PM Volga Rivera Q E /a Aplia: Student Question courses aplia com at serviet/quiz?quiz actionstakeQuiz&quiz; probGuid-ONAPC0A801010000003c9f1d900b0000&ct; =mohammad ahman 0006&ck-m; 15121 680740 0 a a a : Consider the case of Turnbull Co. Turnbull Co. has a target capital structure of 58% debt, 6% preferred stock, and 36% common equity. It has a before-tax cost of debt of 8.2%, and its cost of preferred stock is 9.3%. If its current tax rate is 40%, 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 through retained earnings? the funds If Turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be 12.4%, However, if it is necessary to raise new common equity it will carry a cost of 14.2%. 0.70% 0.64% 0.74% 0.54% Turnbull Co. is considering a project that requires an initial investment of $1,708,000. The firm will raise the $1,708,000 in capital by issuing $750,000 of debt at a before-tax cost of 8.7%, s78,000 of preferred stock at a cost of 9.9%, and $880,000 of equity at a cost of 13.2%. The firm faces a tax rate of 40%, what will be the WACC for s project 9 4% 8.11% 9.54% 6.68% 6.20% Consider the case of Kuhn Co Kuhn Co. is considering a new profect that will require an initial 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 years with a face value of $1,000, an annual coupon rate of 11%, and a market price of $1,555.38. 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. You can assume that Jordan does not incur any flotation costs when issuing debt and preferred stock. Kuhn does not have any retained eamings 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 $22.35 per share, and it is expected to pay a dividend of $2.78 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 9.2%, and they face a tax rate of 40%. Determine what Kuhn Company's WACC will be for this project. Session Timeout Flash Payar HAC 27,0,0,187 59-37

Explanation / Answer

a) WACC = we x ke + wps x kps + wd x kd x (1 - tax)

here, w - weight, k - cost, e - equity, ps - preferred stock, d - debt

Change in cost of equity will lead to change in WACC.

Change in WACC = we x Change in ke = 36% x (14.2% - 12.4%) = 0.64%

b) In this case, we = 880,000 / 1,708,000 = 51.52%, wps = 78,000 / 1,708,000 = 4.57%, wd = 750,000 / 1,708,000 = 43.91%

=> WACC = 51.52% x 13.2% + 4.57% x 9.9% + 43.91% x 8.7% x (1 - 40%) = 9.54%

c) Cost of debt can be calculated using I/Y function on a calculator

N = 15, PMT = 11% x 1000 = 110, PV = -1555.38, FV = 1000 => Compute I/Y = 5.48% = kd

Cost of preferred stock, kps = Dividend / Price = 8 / 92.25 = 8.67%

Cost of new equity, ke = D1 / (P x (1 - f)) + g = 2.78 / (22.35 x (1 - 3%)) + 9.2% = 22.02%

=> WACC = we x ke + wps x kps + wd x kd x (1 - tax)

= 63% x 22.02% + 2% x 8.67% + 35% x 5.48% x (1 - 40%)

= 15.20%

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