Question

**5. Solving for the WACC**

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 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 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 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%.

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.)

A) 0.65%

B) 0.78%

C) 0.72%

D) 0.59%

Turnbull Co. is considering a project that requires an initial
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 8.7%, $30,000
of preferred stock at a cost of 9.9%, and $140,000 of equity at a
cost of 13.2%. The firm faces a tax rate of 25%. What will be the
WACC for this project? * ________ ??* (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 $4 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 $1555.38. 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 $95.70 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 $33.35 per
share, 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 25%. What will
be the WACC for this project? **........???** (Note:
Round your intermediate calculations to two decimal places.)

Answer #1

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 8.2%, and its cost of preferred stock is 9.3%.
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%.
1) If its...

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 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%.
If its current...

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 Turnbull 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 common equity, it will carry a cost of
16.8%.
If its current tax rate is 40%, how much...

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 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 Turnbull can raise all of its equity capital from retained
earnings, its cost of common equity will...

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 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 Turnbull can raise all of its equity capital from retained
earnings, its cost of common equity will...

NOTE: I HAVE 3 QUESTIONS ON HERE, I NEED ANSWER TO ALL
QUESTIONS. THANKS
1)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 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...

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 8.2%, and its cost of preferred stock is 9.3%. 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%. If its
current tax rate is 25%, how much...

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 Turnbull 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 common equity, it will carry a cost of
16.8%.
If its current tax rate is 25%, how much...

Kuhn Co. is considering a new project that will require an
initial investment of $4 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 five years with a par
value of $1,000, an annual coupon rate of 10%, and a market price
of $1,050.76. The yield on the company's current bonds is a good
approximation of the yield on any new bonds that it...

Kuhn Co. is considering a new project that will require an
initial investment of $45 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 five years
with a face value of $1,000, an annual coupon rate of 10%, and a
market price of $1,050.76. The yield on the company’s current bonds
is a good approximation of the yield on any new bonds that it...

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