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. Tumbull Co, has a target capital structure of 58% debt, 6% preferred stock, and 36% common equity. its cost of preferred stock is 12.2. Turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be common equity, it will carry a cost of 16.0% before-tax cost of debt of 11.1%, and 7. However, if it is necessary to raise new its current tax rate is 25%, how much higher will Tumbull'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
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. Tumbull Co, has a target capital structure of 58% debt, 6% preferred stock, and 36% common equity. its cost of preferred stock is 12.2. Turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be common equity, it will carry a cost of 16.0% before-tax cost of debt of 11.1%, and 7. However, if it is necessary to raise new its current tax rate is 25%, how much higher will Tumbull'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
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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Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
Question
Transcribed Image Text:6. 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 55% debt, 6% preferred stock, and 36% common equity. It has a before-tax cost of debt of 11.1%, and
its cost of preferred stock is 12.2%
of 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 16.0%
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)
0 0.04%
O 1.03 %
0 0.65%
Turnbull Co. is considering a project that requires an initial investment of $1,700,000. The firm will raise the $1,700,000 in capital by issuing $750,000
of debt at a before-tax cost of 11.1%, $70,000 of preferred stock at a cost of 12.2%, and $800,000 of equity at a cost of 14.7%. 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 Kuhun Co.
Kuhn Co. is considering a new project that will require an initial investment of $20 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 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 $5 at a price of $92.25 per share.
Kuhn does not have any retained earnings evailable to finance this project, so the firm will have to issue new common stack to help fund . Its
common stock is currently selling for $33.35 per share, and it is expected to pay a dividend of $1.35 at the end of next year Flotation costs will
represent 3% of the funds raised by issuing new common stack. 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)
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