Question

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

Answer 1

Answer:

The weighted cost of capital for the project which is also the project discount rate is 10.12%

Explanation:

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

Ke is the cost of equity of 13.2%

Kd is the cost of debt of 8.7%

Kp is the cost of preferred stock of 9.9%

E is the market value of equity raised of $880,000

D is the market value of debt issued of $750,000

P is the amount of preferred stock sold to investors of $78,000

V is the sum of the market values above=$880,000+$750,000+$78,000=$1708000

WACC=(13.2%*880,000/1708,000)+(8.7%*750,000/1708,000*(1-0.25))+(9.9%*78,000/1708000)=10.12%