You are given the following information for Watson Power Co. Assume the company’
ID: 2383537 • Letter: Y
Question
You are given the following information for Watson Power Co. Assume the company’s tax rate is 40 percent.
8,000 6.9 percent coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 105 percent of par; the bonds make semiannual payments.
19,000 shares of 3 percent preferred stock outstanding, currently selling for $79 per share.
What is the company's WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Debt:8,000 6.9 percent coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 105 percent of par; the bonds make semiannual payments.
Common stock: 410,000 shares outstanding, selling for $59 per share; the beta is 1.15. Preferred stock:19,000 shares of 3 percent preferred stock outstanding, currently selling for $79 per share.
Market: 9 percent market risk premium and 4.9 percent risk-free rate.Explanation / Answer
ANSWER
MV of Common Stock = 410,000 * 59 = 24,190,000$
Cost of Common Stock = Risk Free Rate + Beta (Market Risk Premium)
= 4.9 + 1.15(9)
= 4.9 + 10.35
= 15.25%
MV of Preferred Stock = 19,000 * 79 = 1,501,000
Cost of Preferred Stock = Dividend/Market Price
= 3/79
= 3.80%
MV of Debt = 8,000 * 105 = 8,400,000
Cost of Debt = Using Financial Calculator,
Where, n=40; PV= -1050; FV=1000; PMT=34.5; I/Y=?
I/Y = 6.45%
Cost of Debt = 6.45(1-0.4)
Cost of Debt = 3.87%
Total Market Value = MV of Debt + MV of Common Stock + MV of Preferred Stock
=24,190,000 + 1,501,000 + 8,400,000
= 34,091,000$
WACC = (Weight of Common Stock * Cost of Common Stock) + (Weight of Debt * Cost of Debt) + (Weight of Preferred Stock * Cost of Preferred Stock)
= (24,190,000/34,091,000 * 15.25) + (8,400,000/34,091,000 * 3.87) + (1,501,000/34,091,000 * 3.80)
= 11.94%
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