Turnbull co. has a target capital structure of 45% debt, 4% preferred stock, and 51% common equity. it has a before-tax cost of debt of 11.1%, and its cost of preferred stock is 12.2%. if turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be 14.7%. however, if it is necessary to raise new common equity, it will carry a cost of 16.8%. if its current tax rate is 25%, how much higher will turnbull’s weighted average cost of capital (wacc) be if it has to raise additional common equity capital by issuing new common stock instead of raising the funds through retained earnings? (note: round your intermediate calculations to two decimal places.)

TurnBull's Weighted Average cost of capital is higher by 1.07% if the used common Equity to raised the capital.

Explanation:

First, using the WACC formula and using Retained earnings cost of Capital. we get the following outcome.

WACC = Debt W x after tax cost of Debt + Preferred Stock weight x Cost of capital + Equity W x Cost of Capital

WACC = 45% x 8.33% + 4% x 12.20% + 51% x 14.70% =

WACC = 3.75% + 0.49% + 7.50% = 11.73%

Second, using the WACC formula and using common equity cost of Capital. we get the following outcome.

WACC = Debt W x after tax cost of Debt + Preferred Stock weight x Cost of capital + Equity W x Cost of Capital

WACC = 45% x 8.33% + 4% x 12.20% + 51% x 16.80% =

WACC = 3.75% + 0.49% + 8.57% = 12.80%

Increase Cost using common equity over Retained earnings is (12.80% - 11.73% ) = 1.07%

i believe that it is a 45% chance.

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