You are given the following information for Lightning Power Co. Assume the compa

Question

You are given the following information for Lightning Power Co. Assume the company’s tax rate is 40 percent.

7,000 6.2 percent coupon bonds outstanding, $1,000 par value, 15 years to maturity, selling for 105 percent of par; the bonds make semiannual payments.

12,000 shares of 5 percent preferred stock outstanding, currently selling for $72 per share.

What is the company's WACC? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

  Debt:

7,000 6.2 percent coupon bonds outstanding, $1,000 par value, 15 years to maturity, selling for 105 percent of par; the bonds make semiannual payments.

  Common stock: 340,000 shares outstanding, selling for $52 per share; the beta is 1.08.   Preferred stock:

12,000 shares of 5 percent preferred stock outstanding, currently selling for $72 per share.

  Market: 8 percent market risk premium and 4.20 percent risk-free rate.

Explanation / Answer

- After tax Kd = 62 x (1 - 0.4)/1,050 = 3.54%
Market value of debt = 7,000 x 1,050 = $7,350,000

- Kp = 5/72 = 6.94% (Assuming par value of preferred stock = $100)
Market value of preferred stock = 12,000 x 72 = $864,000

- Ke = 4.2 + (8 x 1.08) = 12.84%
Market value of common stock = 340,000 x 52 = $17,680,000

- Total market value of the firm = $25,894,000

WACC = [(7,350,000 x 3.54%) + (864,000 x 6.94%) + (17,680,000 x 12.84%)] / 25,894,000 = 10%

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.