You are given the following information for Lightnening Power Co. Assume the com

Question

You are given the following information for Lightnening Power Co. Assume the company's tax rate is 35 percent. Debt: 6,000 7.3 percent coupon bonds outstanding, $1,000 par value, 15 years to maturity, selling for 109 percent of par; the bonds make semiannual payments.

Common stock: 450,000 shares outstanding, selling for $63 per share; the beta is 1.06.

Preferred stock: 23,000 shares of 4 percent preferred stock outstanding, currently selling for $83 per share.

Market: 12 percent market risk premium and 5.30 percent risk-free rate.

What is the company's WACC?

Explanation / Answer

Debt - 5.0 mil pays 7.2%, or 360,000 less 40% on a market value of 5.0 x 1.08, or 5.4 mil. Net cost 216,000 / 5.4 mil. = 4%

Common - Per CAPM: R = 5.2 + 1.05 (11%) = 16.75%

Preferred - 22,000 shs at 100 par, or 2,200,000 pays 3%, or 66,000 on market value of 1,804,000.

WACC -
Debt of 5.4 mil costs 4%, or 216,000
Common at market value of 27,280,000 costs 16.75%, or 4,569,400
Preferred at 1,804,000 costs 3.66%, or 66,000
Total cost 4,851,400 on total Capital of 34,484,000 = 14.07%

Or -
15.66% in Debt @ 4% = 0.626%
79.11% in Common @ 16.75% = 13.25%
5.23% in Preferred @ 3.66% = 0.19
100% = 14.07%

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