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 9.6%, $30,000 of preferred stock at a cost of 10.7%, and $140,000 of equity at a cost of 13.5%. The firm faces a tax rate of 40%. What will be the WACC for this project

10.32%

Explanation:

WACC is the average cost of capital of the firm based on the weightage of the debt and weightage of the equity multiplied to their respective costs. weightage can be calculated by using the market value of the equity and debt.

The formula for WACC is

Weighted average cost of capital = (Cost of Common stock x Weightage of Common stock) + (Cost of debt (1 - tax ) x Weightage of debt) + (Cost of Preferred stock x Weightage of Preferred stock)

Weighted average cost of capital = (13.5% x 140,000 / 270,000) + (9.6%(1 - 0.4) x $1,00,000 / $270,000 ) + (10.7% x $30,000 / $270,000 )

Weighted average cost of capital = 7% + 2.13% + 1.19% = 10.32%

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