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Whitepunk [10]
3 years ago
8

Turnbull Co. is considering a project that requires an initial investment of $1,708,000. The firm will raise the $1,708,000 in c

apital by issuing $750,000 of debt at a before-tax cost of 10.2%, $78,000 of preferred stock at a cost of 11.4% amd $880,000 of equity at a cost of 14.3%. The firm faces a tax rate of 40%. What will be the WACC for this project?
Business
1 answer:
Sedaia [141]3 years ago
6 0

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%

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Which economic utility increased when fast-food restaurants began accepting credit.
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You manage a risky portfolio with an expected rate of return of 21% and a standard deviation of 32%. The T-bill rate is 8%. Your
Alborosie

Answer: Treasury Bills - 35%

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Explanation:

Hello.

The question was a tad incomplete so I attached the relevant portion from a similar question as a guide.

The client already has 35% invested in T- bills so that would be the T- bill proportion.

Now we need the proportions of the other 3 stocks.

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= 0.2405

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5 0
3 years ago
Blue Hamster Manufacturing INC, is a small firm, and several of its managers are worried about how soon the firm will be able to
Eddi Din [679]

Answer and Explanation:

1. The computation is shown below:-

                                   <u>Year 0               Year 1       Year 2       Year 3 </u>

Expected Cash flow ($6,000,000)  $2,400,000  $5,100,000  $2,100,000

Cumulative Cash

flow                          ($6,000,000)  ($3,600,000)  $1,500,000 $3,600,000

Conventional Payback

Period                                                     1                      0.71

For the computation of cumulative cash flow for the first year, we simply deduct expected cash flow the Year 0 from Year 1 for the second year we added the Cumulative cash flow of year 1 with the expected cash flow of year 2 and for third year we added Expected cash flow of year 3 with a cumulative cash flow of year 2

and for conventional payback period for year 1

Conventional Payback Period = 1 + ($3,600,000 ÷ $5,100,000)

= 1 + 0.71

= 1.71 year

2. The computation is shown below:-

                                       <u>Year 0               Year 1       Year 2       Year 3 </u>

Expected Cash flow ($6,000,000)  $2,400,000  $5,100,000  $2,100,000

Discount factor at

9%                                   1                    0.91743      0.84168        0.77218

Discounted Cash

Flow                        ($6,000,000)   $2,201,835   $4,292,568  $1,621,585

Cumulative Discounted

Cash Flow               ($6,000,000)   ($3,798,165)   $494,403   $2,115,988

Discounted Payback

Period                                                         1               0.88

Conventional Payback Period = 1 + ($3,798,165 ÷ $4,292,568)

= 1 + 0.88

= 1.88 year

3. B. Discounted Payback Period.

The payback period is the period in which it tells in how many years the initial investment amount could be recovered and the discounted payback period is the period in which the cash outflows and the cash inflows are discounted

4. B. $2,115,988 which shows the more than the higher the cash inflow above the project investment value.

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