Question

7. 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 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, if its current tax rate is 40%, how much higher will 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 8.2%, and its cost of preferred it has to raise additional common equity capital by stock is 9.3%. issuing new common stock instead of raising the funds through retained earnings? If Turnbull can raise all of its equity capital from retained O 0.64% earnings, its cost of common equity will be 12.4%. O 0.58% However, if it is necessary to raise new common equity, O 0.74% it will carry a cost of 14.2%. O 0.77% 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 9.6%, $30,000 of preferred stock at a cost of 10.7%, and $140,000 of equity at a cost of 13.5%. The firm faces a tax rate of 40%. What will be the WACC for this project?

Answer 1

1.
=proportion of common equity*difference in cost
=36%*(14.2%-12.4%)
=0.648%

2.
=Sum(proportion of each source*cost of each source)
=(100000*9.60%*(1-40%)+30000*10.7%+140000*13.5%)/270000
=10.33%

3.
=45%*(RATE(5,10%*1000,-1050.76,1000)*(1-40%))+4%*(9/95.70)+51%*(2.78/(22.35*(1-8%))+8.7%)
=14.059%