Question

Turnbull Co. is considering a project that requires an initial investment of $270,000. The firm will raise the $270,000 in capital by issuing $100,000 of debt at a before-tax cost of 8.7%, $30,000 of preferred stock at a cost of 9.9%, and $140,000 of equity at a cost of 13.2%. The firm faces a tax rate of 40%. What will be the WACC for this project

Answer 1

Answer:

The answer 9.88%

Explanation:

Value of Debt = $100,000

Value of Preferred Stock = $30,000

Value of Equity = $140,000

Weight of Debt = $100,000 / $270,000

Weight of Debt = 0.37

Weight of Preferred Stock = $30,000 / $270,000

Weight of Preferred Stock = 0.11

Weight of Equity = $140,000 / $270,000

Weight of Equity = 0.52

After Tax Cost of Debt = 8.7% (1 – 0.40)

After Tax Cost of Debt = 5.22%

WACC = (Weight of Debt x After Tax Cost of Debt) + (Weight of Preferred Stock x Cost of Preferred Stock) + (Weight of Equity x Cost of Equity)

WACC = (0.37 x 5.22%) + (0.11 x 9.9%) + (0.52 x 13.2%)

WACC = 9.88%