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 8.7%, $78,000 of preferred stock at a cost of 9.9%, and $880,000 of equity at a cost of 13.2%. 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.)

Question

Reed Skinner

Business

8 February, 20:19

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 8.7%, $78,000 of preferred stock at a cost of 9.9%, and $880,000 of equity at a cost of 13.2%. 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.)

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Answers (1)

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Lamar Hood · Answer 1

10.23% (approx)

Explanation:

WACC for this project:

= (Debt : Initial investment) * cost * (1 - tax rate) + (Preferred stock : Initial investment) * cost + (Equity : Initial investment) * cost

= (750,000 : 1,708,000) * 8.7 * (1 - 0.25) + (78,000 : 1,708,000) * 9.9 + (880,000 : 1,708,000) * 13.2

= (0.44 * 8.7 * 0.75) + (0.05 * 9.9) + (0.52 * 13.2)

= 2.871 + 0.495 + 6.864

= 10.23% (approx)