value 10.00 points P14-15 Finding the WACC LO3] Consider the following informati
ID: 1172773 • Letter: V
Question
value 10.00 points P14-15 Finding the WACC LO3] Consider the following information for Evenflow Power Co. Debt 4,500 7 percent coupon bonds outstanding, $1,000 par value, 22 years to maturity, selling for 104 percent of par, the bonds make semlannual payments 103.500 shares outstanding, selling for $56 per share; the beta is 11. 14,500 shares of 6 percent preferred stock outstanding, currently selling for $106 per share 9 percent market risk premlum and 5 percent risk-free rate Common stock: Preferred stock Market Assume the company's tax rate is 33 percent Required: Find the WACC. (Do not round your Intermedlate calculations.) 10.05% 9.65% 0 955% 10.5% 98% References eBook & ResourcesExplanation / Answer
9.65%
Difference in decimal place in 2nd place is due to rooundingg off difference.
Working;
a. After Tax cost of debt 4.48% Working: i. Par Value $ 1,000 Current Price $ 1,000 x 104% = $ 1,040 Semi annual Coupon interest $ 1,000 x 3.5% = $ 35 Semi annual periods to maturty 22*2 = 44 ii. Semi annual Yield to maturity = Average Income / Average Investment = (C+(F-P)/n)/((P+F)/2) Where, = (35+(1000-1040)/44)/((1000+1040)/2) F $ 1,000 = 3.34% P $ 1,040 C $ 35 iii. Annual Yield to Maturity = 3.34% x 2 n 44 = 6.68% iv. After tax yield to maturity = 6.68%*(1-0.33) = 4.48% b. Cost of preferred stock 5.66% Working: i. Preferred Dividend = $ 100 x 6% = $ 6 ii. Cost of preferred Stock = Dividend /Current Price = $ 6 / $ 106 = 5.66% c. Costs of Common Stock 14.90% Costs of Common Stock = Risk free rate + Beta * market risk premium = 5% + 1.1 x 9% = 14.90% d. Number Per unit sale price Total Weight Debt 4,500 $ 1,040 $ 46,80,000 0.390 Common Stock 1,03,500 $ 56 $ 57,96,000 0.482 Preferred Stock 14,500 $ 106 $ 15,37,000 0.128 Total $ 1,20,13,000 1.000 e. Weight Cost Weighted Cost Debt 0.390 4.48% 1.74% Common Stock 0.482 14.90% 7.19% Preferred Stock 0.128 5.66% 0.72% WACC 9.66%Related Questions
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