Turnbull Company is considering a project that requires an initial investment of $570,000.00. The firm will raise the $570,000.00 in capital by issuing $230,000.00 of debt at a before-tax cost of 11.10%, $20,000.00 of preferred stock at a cost of 12.20%, and $320,000.00 of equity at a cost of 14.70%. The firm faces a tax rate of 40%. The WACC for this project is

Question

Xander Morrison

Business

3 June, 00:37

Turnbull Company is considering a project that requires an initial investment of $570,000.00. The firm will raise the $570,000.00 in capital by issuing $230,000.00 of debt at a before-tax cost of 11.10%, $20,000.00 of preferred stock at a cost of 12.20%, and $320,000.00 of equity at a cost of 14.70%. The firm faces a tax rate of 40%. The WACC for this project is

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Cristal · Answer 1

WACC = Ke (E/V) + Kp (P/V) + Kd (D/V) (1-T)

WACC = 14.7 ($320,000/$570,000) + 12.2 ($20,000/$570,000) + 11.10 ($230,000/$570,000) (1-0.40)

WACC = 8.25 + 0.43 + 2.69

WACC = 11.37%

Explanation:

Weighted average cost of capital is a function of cost of equity and proportion of equity in the investment plus cost of preferred stock and proportion of preferred stock in the investment plus after-tax cost of debt and the proportion of debt in the investment.