Kuhn Co. is considering a new prject that will require an initial investment of
ID: 2383420 • Letter: K
Question
Kuhn Co. is considering a new prject that will require an initial investment of $45 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 15 years with a face value of $1,000, an annual coupon rate of 11%, and a market price of $1,55.38. The yeild on the company's current bonds is a good approximation f the yeild 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 $92.25 per share. You can assume that Jordan does not incur any flotation costs when issuing debt and preffered stock.
Kuhn does not have any retained earnings available to finance this project, so the firm will have to issue new common stocl to help fund it. Its common stock is currently selling for $33.35 per share, and it is expected to pay a dividend of $1.36 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.
A. 9.79%
B. 7.83%
C. 11.75%
D. 8.32%
Explanation / Answer
- Amount of debt = 45 x 35% = $15.75 million
Amount of preferred stock = 45 x 2% = $0.9 million
Amount of commmon stock = 45 x 63% = $28.35 million
- Cost of debt(Kd) = Interest x (1-t)/Current price of bond = 110 x (1-0.40)/1,55.38 = 42.47%
- Cost of preferred stock(Kp) = Preferred Dividend / Price of preferred stock = 9/ 92.25 =9.756%
- Cost of common stock(Ke) = D1 / [P0 x (1-f)] + g = 1.36 / [33.35 x (1-0.03)] + 0.092 = 13.40%
- WACC = [(15.75 x 4.24%) + (0.9x 8.36%) + (28.35x 13.40%)] / 45
=[66.78+7.524+379.89]/45=10.093%
Note: Please check the options given or data provided once again. Since it is the only possible answer with the given data.
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