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Consider the case of Kuhn Co. Kuhn Co. is considering a new project that will require an initial investment of $45 million. It has a target capital structure of 58% debt, 6% preferred stock, and 36% common equity. Kuhn has noncallable bonds outstanding that mature in five years with a face value of $1,000, an annual coupon rate of 10%, and a market price of $1,050.76. The yield on the company?s current bonds is a good approximation of the yield on any new bonds that it issues. The company can sell shares of preferred stock that pay an annual dividend of $8 at a price of $92.25 per share. Kuhn does not have any retained earnings available to finance this project, so the firm will have to issue new common stock to help fund it. Its common stock is currently selling for $33.35 per share, and it is expected to pay a dividend of $2.78 at the end of next year. Flotation costs will represent 8% of the funds raised by issuing new common stock. The company is projected to grow at a constant rate of 9.2%, and they face a tax rate of 40%. Determine what Kuhn Company?s WACC will be for this project. 12. 14% 10. 12% 8 . 1 0% 10.63% Each of the following factors affects the weighted average cost of capital (WACC) equation. Which are factors that the firm cannot control? Check all that apply. The firm?s capital budgeting decision rules Interest rates in the economy The performance of index funds such as the S&P 500 The impact of cost of capital on managerial decisions Consider the following case: Moreschi Co. has two division5, L and H. Division L is the company?s low-risk division and would have a WACC of 8% if it were operated as an independent company. Division H is the company?s high-risk division and would have a WACC of 14% if it were operated as an independent company. Because the two divisions are the same size, the company has a composite WACC of ll%. Division H is considering a project with an expected return of 12%. Should Moreschi Co. accept or reject the project? Accept Reject On what grounds do you base your accept-reject decision? Division H?s project should be accepted, because its return is greater than the risk-based cost of capital for the division. Division H?s project should be rejected, because its return is less than the risk-based cost of capital for the division

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