mbld- 572827nbWodeld 207953e6 MINDTAP .. Assignment 10-The Cost of Capita Allyah
ID: 2788398 • Letter: M
Question
mbld- 572827nbWodeld 207953e6 MINDTAP .. Assignment 10-The Cost of Capita Allyah ca Due Tomorrow at 11 PM CST realize that the WACC is an appropriste discount rate only for a project of average risk. Analyze the cost of capital situations of the is used as the discount rate to evaluate various capital budgeting projets. However, it is important to 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 or 58% debt, 6% preferred stock, and 36% common equity. It has a before-tax cost of debt of 8.2%, and its cost of preferred stock is 9 396 r ts current tax rate is 40%. how much higher mm Tumbun's weighted average cost or capital (wACC) be if it has to raise additional common equity capital by ssuing new common stock instead of raising the funds through retained earnings? If Tunbull can raise all of its equity capital from retained earnings, its cost of common equity However, if it is necessary to raise new common equity it vill carry a cost of 14.2%. will be 12.4%. Q 064% 0.54% Turnbull Co is considering a project that requires an initial Investment of $1,708,000. The firm will raise the $1,708,000 in capital by issuing $750,000 of debt at a before tax cost of 11. 1%$78,000 of preferred stock at a cost of 12.2%, and $860 000 of equity at a cost of 14.7%. The firm, faces a tax rate of 40%, what will be the WACC for this project 11.06 Consider the case of Kuhn Co. DesktopExplanation / Answer
WACC if capital raised through retained earnings = wd*cost of debt(1-t)+wp*cost of pref. cost+we* costs of equity (retained earnings)
WACC (retained earnings)= 0.58* 8.2% (1-0.40) + 0.06* 9.3% + 0.36* 12.4% = 2.85%+ 0.744% + 4.46% = 8.058%
WACC if capital raised through market = 0.58* 8.2% (1-0.40) + 0.06* 9.3% + 0.36* 14.2% = 2.85%+ 0.744% + 5.112 = 8.706 %
Additional WACC if capital raised through equity market instead of retained earnings = 8.706% - 8.058% = 0.648%
Total Investment amount = $1,708,000
Debt = 750000 or 7,50,000/1708,000 = 0.43911 0r 43.911%
Before Tax Cost of Debt = 11.1%
Preferred Stock = 78000 or 78000/1708000 = 0.045667 or 4.5667%
Cost of preference stock = 12.2%
Equity Stock = 880000 or 880000/1708000 = 0.515222 or 51.522%
Cost of Equity = 14.7%
WACC = Wd*Cd(1-t)+Wp*Cp+We*Cp
= 0.43911* 11.1%(1-0.40)+ 0.045667* 12.2% + 0.51522*14.7%
= 2.92%+0.557131% + 7.57% = 11.045%
Cost of Debt = using Financial Calculator we can easily find the cost of debt (Texas, BA II Plus)
Input the following data and get the cpt =>i
FV = 1000
PV = -1555.38
n = 15
PMT = 110
CPT => I/Y = 5.48% . Hence Cost of Debt = 5.48%
Cost of Preference Stock = Dividend/ Price = 9/95.7 = 0.094044 = 9.4044%
Cost of Equity = D1/ P(1-f)+g = 2.78/(33.35* (1-8%)) + 8.7% = 2.78/30.682 + 8.7% 0.177607 = 17.76%
Tax rate = 40%
WACC = Wd*Cd(1-t)+Wp*Cp+We*Ce = 0.58*5.48%(1-0.40) + 0.06*9.4044% + 0.36*17.76% = 1.907 + 0.564264 + 6.3936% = 8.87% (Answer)
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