If its current tax rate is 40%, Turnbull’s weighted average cost of capital (WACC) will be (1.23 / 1.07 / 1.44 / 0.91) higher if it has to raise additional common equity capital by issuing new common stock instead of raising the funds through retained earnings. Turnbull Company is considering a project that requires an initial investment of $1,708,000.00. The firm will raise the $1,708,000.00 in capital by issuing $750,000.00 of debt at a before-tax cost of 9.60%, $78,000.00 of preferred stock at a cost of 10.70%, and $880,000.00 of equity at a cost of 13.50%. The firm faces a tax rate of 40%. The WACC for this project is (6.48 / 9.97 / 6.98 / 8.47) .
If its current tax rate is 40%, Turnbull’s weighted average cost of capital (WACC) will be (1.23 / 1.07 / 1.44 / 0.91) higher if it has to raise additional common equity capital by issuing new common stock instead of raising the funds through retained earnings. Turnbull Company is considering a project that requires an initial investment of $1,708,000.00. The firm will raise the $1,708,000.00 in capital by issuing $750,000.00 of debt at a before-tax cost of 9.60%, $78,000.00 of preferred stock at a cost of 10.70%, and $880,000.00 of equity at a cost of 13.50%. The firm faces a tax rate of 40%. The WACC for this project is (6.48 / 9.97 / 6.98 / 8.47) .
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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If its current tax rate is 40%, Turnbull’s weighted average cost of capital (WACC) will be (1.23 / 1.07 / 1.44 / 0.91) higher if it has to raise additional common equity capital by issuing new common stock instead of raising the funds through retained earnings .
Turnbull Company is considering a project that requires an initial investment of $1,708,000.00. The firm will raise the $1,708,000.00 in capital by issuing $750,000.00 of debt at a before-tax cost of 9.60%, $78,000.00 of preferred stock at a cost of 10.70%, and $880,000.00 of equity at a cost of 13.50%. The firm faces a tax rate of 40%. The WACC for this project is (6.48 / 9.97 / 6.98 / 8.47) .
Transcribed Image Text:**Weighted Average Cost of Capital (WACC)**
The **weighted average cost of capital (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.
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**Consider the case of Turnbull Company:**
Turnbull Company has a target capital structure of 45% debt, 4% preferred stock, and 51% common equity. It has a before-tax cost of debt of 11.10%, and its cost of preferred stock is 12.20%. If Turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be 14.70%. However, if it is necessary to raise new common equity, it will carry a cost of 16.80%.
If its current tax rate is 40%, Turnbull’s weighted average cost of capital (WACC) will be ___% higher if it has to raise additional common equity capital by issuing new common stock instead of raising the funds through retained earnings.
Turnbull Company is considering a project that requires an initial investment of $1,708,000.00. The firm will raise the $1,708,000.00 in capital by issuing $750,000.00 of debt at a before-tax cost of 9.60%, $78,000.00 of preferred stock at a cost of 10.70%, and $880,000.00 of equity at a cost of 13.50%. The firm faces a tax rate of 40%. The WACC for this project is ___%.
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