Question

Please help me and be clear on all three questions.

Thank you

Consider the case of Turnbull Co. Turnbull Co. has a target capital structure of 45% debt, If its current tax rate is 40%, how much higher will 4% preferred stock, and 51% 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 1.15% earnings, its cost of common equity will be 12.4%. O 0.92% However, if it is necessary to raise new common equity, 1.10% it will carry a cost of 14.2%. 01.20% 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 10.2%, $30,000 of preferred stock at a cost of 11.4%, and $140,000 of equity at a cost of 14.3%. The firm faces a tax rate of 40%. What will be the WACC for this project? 10.95% 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 45% debt, 4% preferred stock, and 51% 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 issues. The company can sell shares of preferred stock that pay an annual dividend of $9 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 $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. 13.26% 13.96% 15.36% 11.17% 13.26% Flash Player MAC 32.0.0.293

Answer 1

rate positively ..

ans 1
	Post tax cost of debt =8.2%*(1-40%)			4.920%
	using retained earning
	Source	Weight	Cost	Weight * cost
	Debt	45%	4.920%	2.21400%
	preferred stock	4%	9.30%	0.37200%
	retained earning	51%	12.40%	6.32400%
A		100%		8.91000%
	using Fresh issue
	Source	Weight	Cost	Weight * cost
	Debt	45%	4.920%	2.21400%
	preferred stock	4%	9.30%	0.37200%
	Fresh issue	51%	14.20%	7.24200%
B		100%		9.82800%
C=B-A	Therefore change in WACC =			0.92%
	Ans =			0.92%
ans 2
	After tax cost of debt =		10.2%*(1-40%)
			6.12%
	computation of WACC
	using Fresh issue
	Source	Value	weight	Cost	Weight * cost
	Debt	100000	37.04%	6.120%	2.27%
	preferred stock	30000	11.11%	11.40%	1.27%
	Equity	140000	51.85%	14.30%	7.41%
		270000	100.00%		10.95%
	ans =				10.95%
ans 3
	Computation of post tax cost of debt
	we have to use financial calculator to solve this
	put in calculator
	FV		1000
	PV		-1050.76
	PMT	1000*10%	100
	N		5
	Compute I		8.70%
	Post tax cost of debt = 8.7%*(1-40%)			5.22%
	Cost of preferred stock = Annual dividend/Price today
			9/95.7
			9.404%
	Cost of equity =	(Expected dividend next year/(issue price - flotation cost)) + Growth rate
			2.78/(22.35-22.35*3%)+9.2%
			22.023%
	computation of wACC
	Source	weight	Cost	Weight * cost
	Debt	45.00%	5.220%	2.35%
	preferred stock	4.00%	9.40%	0.38%
	Equity	51.00%	22.02%	11.23%
		100.00%		13.96%
	ans =			13.96%