Given the following information for Evenflow Power Co., the WACC is __?___ perce
ID: 2644480 • Letter: G
Question
Given the following information for Evenflow Power Co., the WACC is __?___ percent. Assume the company's tax rate is 35 percent. (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16))
8,000 bonds outstanding, 6.5 percent coupon rate (APR), $1,000 par value, 20 years to maturity, selling for 92 percent of par; the bonds make semiannual payments.
250,000 shares outstanding, selling for $57 per share; the beta is 1.05.
15,000 shares of 5 percent preferred stock outstanding, currently selling for $93 per share. (Note: a 5% preferred stock means that the dividend is $5)
8 percent market risk premium and 4.5 percent risk-free rate.
Given the following information for Evenflow Power Co., the WACC is __?___ percent. Assume the company's tax rate is 35 percent. (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16))
Explanation / Answer
Cost of Bond = Interest (1-tax) + (redemption value-Book Value)/no of years/(Redemption Value+Book Value)/2
= 65(1-0.35) + (1000-920)/40 /(1000+920)/2
= 42.25 + 2/960
= 44.25/960
cost of bond = 4.60%
Cost of Common Stock = Risk free rate + Beta * market risk premium
= 4.5 % + 1.05*8%
= 12.9%
Cost of Preference Share capital = Dividend/Market price of Preferred stock
= 5/93 = 5.37%
total Source of capital = capital through Equity + capital through preference + capital through bonds
= 14250000 + 1395000 + 7360000
= $ 23005000
Share of equity in total funds = 0.61
Share of prefernce in total funds = 0.06
Share of bonds in total funds = 0.31
WACC = 0.61*12.9%+ 0.06*5.37%+0.31*4.60%
= 9.61%
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