Consider the case of Turnbull Co. Tumbull C. has a target capital structure of 5
ID: 2383597 • Letter: C
Question
Consider the case of Turnbull Co. Tumbull C. has a target capital structure of 58% debt. 6% preferred stock, and 36% common equity. It has a before-tax cost of debt of 11.1%, and its cost of preferred stock is 12.2%. If its current tax rate is 409, how much higher wa Turnbull's weighted average it has to raise addtional common equity capital issuing new common stock instead of raising the funds through retained earnings? wil cost of capital (WACC, be r to raise addkional common equity capital by If Turnbull can raise all of its equity capital from retained earnings, its cost of common equity wili be 14.7%. However, if it is necessary to raise new common equity itwil carry a cost of 16.8%. retained 90.75% 0.94% 0.86% Consider the case of Jordan Co. Jordan Co.'s CFO is trying to determine the company's WACC. He has determined that the company's before-tax cost of debt is 1 1.1%. The comoany rently has $100,000 of debt, and the CFO believes that the book value cr the company's debt is a good approximation for the market value of the company's debt. · . · The firm's cost of preferred stock is 12.2%, and the book value of preferred stock is siaso. Its cost of equity is 14.7%, and the company currently has S85.000 of common equity on its balance sheet. The CFO has estimated that the firm's market value of preferred stock is $30,000, and the market value of its common equity is $140,000 Determine Jordan's WACC if it is subject to a tax rate of 40%. Consider the case of Kuhn Co Kuhn Co. is considering a new praject that will require an initial inwestment of $45 million. It has a target capital structure of 58% debt, 6% preferred stock, and 36% common equity. Kuhn has noncallable bords outstanding that mature in 15 years with a face value of $1,000, an annual coupon rate of 1 i%, and a market price of $1,555.38. The yield on the company's current bonds is good approximation of the yield on any new bonds that it issues. The company can sell shares of preferred stock that pay an annuail dividend of 58 at a price of $95.70 per share. You can assume that Jordan does not incur any flotation costs when issuing debt and prefenred stock. Kuhn does not have any retained earmings availebie to finance this project, so the firm will have to issue new common stock to help dividend of $1.36 at the end of next year. Fotation costs will represent 3% of the Ands raised by issung new common stock. The company is propected to grow at a constant rateof B.7ss, and they face a tar rate of 40%. Determine what Kuhn Company's WACC will be for this project fund it. Its common stock is currently selling for $33.35 per share, and it is expected to pay aExplanation / Answer
WACC=wd*kd*(1-t)+Ws*Ks+Wp*Kp
using this formula calculate change as shown.
=58%*11.1*(1-40%)+6%*12.2%+36%*16.8%-58%*11.1*(1-40%)+6%*12.2%+36%*14.7%
=10.64%-9.89%
=0.75%