Turnbull Co. is considering a project that requires an initial investment of $1,708,000. The firm will raise the $1,708,000 in capital by issuing $750,000 of debt at a before-tax cost of 9.6%, $78,000 of preferred stock at a cost of 10.7%, and $880,000 of equity at a cost of 13.5%. The firm faces a tax rate of 25%. What will be the WACC for this project?

The WACC for this project is 10.605%

Explanation:

The WACC or the weighted average cost of capital is the weighted average return that the company is expected to pay its capital providers.The WACC is calculated by multiplying the cost of each component by their respective weights in the capital structure. The WACC is calculated using the following formula,

WACC = wD * (1-tax) * rD  +  wP * rP  +  wE * rE

Where,

WACC = 750000/1708000 * (1-0.25) * 0.096  +  78000/1708000 * 0.107  +  880000/1708000 * 0.135

WACC =  0.10605 or 10.605%