the weighted average cost of capital (wacc) is used as the discount rate to evaluate various capital budgeting projects. however, it is important to realize that the wacc is an appropriate discount rate only for a project of average risk. consider the case of turnbull company: turnbull company has a target capital structure of 58% debt, 6% preferred stock, and 36% common equity. it has a before-tax cost of debt of 11.10%, and its cost of preferred stock is 12.20%. if turnbull can raise all of its equity capital from retained earnings, its cost of common equity will be 14.70%. however, if it is necessary to raise new common equity, it will carry a cost of 16.80%.
