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Turnbull Company is considering a project that requires an initial investment of $570,000.00. The firm will raise the $570,000.00 in capital by issuing $230,000.00 of debt at a before-tax cost of 11.10%, $20,000.00 of preferred stock at a cost of 12.20%, and $320,000.00 of equity at a cost of 14.70%. The firm faces a tax rate of 40%. The WACC for this project is

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Answer:

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

WACC = 14.7($320,000/$570,000) + 12.2($20,000/$570,000) + 11.10($230,000/$570,000)(1-0.40)

WACC = 8.25 + 0.43 + 2.69

WACC = 11.37%

Explanation:

Weighted average cost of capital is a function of cost of equity and proportion of equity in the investment plus cost of preferred stock and proportion of preferred stock in the investment plus after-tax cost of debt  and the proportion of debt in the investment.

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