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Answer to Question
1.:
Turnbull Co.:
Value of Debt = $100,000
Value of Preferred Stock = $30,000
Value of Equity = $140,000
Weight of Debt = $100,000 / $270,000
Weight of Debt = 0.37037
Weight of Preferred Stock = $30,000 / $270,000
Weight of Preferred Stock = 0.11111
Weight of Equity = $140,000 / $270,000
Weight of Equity = 0.51852
After Tax Cost of Debt = 10.2% * (1 – 0.25)
After Tax Cost of Debt = 7.65%
WACC = (Weight of Debt * After Tax Cost of Debt) + (Weight of
Preferred Stock * Cost of Preferred Stock) + (Weight of Equity *
Cost of Equity)
WACC = (0.37037 * 7.65%) + (0.11111 * 11.4%) + (0.51852 *
14.3%)
WACC = 11.515%
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