Answer:
11.25%
Explanation:
Tunbull Co. are planning to start a project that requires an initial investment of $1,708,000
The firm is able to raise $1,708,000 in capital by issuing an amount of $750,000 in debt
Before-tax cost is 10.2%
Preferred stock is $78,000 at 11.4%
The equity is $880,000 at a cost of 14.3%
Tax rate is 40%
The first step is to calculate the weight of preferred stock, weight of debt, weight of equity and after-tax cost of debt.
(a)Weight of preferred stock
= $78,000/$1,708,000
= 0.0457
(b)Weight of debt
= $750,000/$1,708,000
= 0.04391
(c) weight of equity
= $880,000/$1,708,000
= 0.5152
(d) After-tax cost of debt
= 10.2% × (1-25/100)
= 10.2% × ( 1-0.25)
= 10.2%×0.75
= 7.64
Therefore, the wacc can be calculated as follows
Wacc= (weight of debt×after-tax cost)+(weight of preferred stock×cost of preferred stock)+(Weight of equity×cost of equity)
= (0.4391×0.0765)+(0.0457×0.1140)+(0.5152×0.1430)
= 0.03359+0.0052+0.07367
= 0.1125×100
= 11.25%
Hence the wacc for this project is 11.25%
