Given the following information for Evenflow Power Co., the WACC is percent. Ass

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))


Debt:
3,000 6 percent coupon bonds outstanding, $1,000 par value, 21 years to maturity, selling for 102 percent of par; the bonds make semiannual payments.
Common stock:
69,000 shares outstanding, selling for $63 per share; the beta is 1.05.
Preferred stock:
10,000 shares of 5 percent preferred stock outstanding, currently selling for $104 per share.
Market:
7.5 percent market risk premium and 4.5 percent risk-free rate.

Explanation / Answer

The cost of debt is the YTM of the bonds, so: 1020= 30 PVIFA(x%,42) + 1000 PVIF (x%,42) R= 2.92% YTM= 2.92x2= 5.84%= Rd And the after tax cost of debt is: 5.84x(1-.35)= 3.796% The cost of preferred stock Rp= 5/104= .0481 or 4.81% Now, we can find the cost of equity using the CAPM. The cost of equity is: Re = .045 + 1.05(.075) = .12375 or 12.375% We will begin by finding the market value of each type of financing. We find: MVd = 3,000x1020 = $3060,000 MVe = 69000($57) = $3933000 MVp = 10,000($104) = $1,040,000 And the total market value of the firm is: V = $3,060,000 + 3,933,000 + 1,040,000 = $8,033,000 WACC = 3.796(3060000/8033000) + 12.375(3933000/8033000) + 4.81(1,040,000/8033000) = . 7.567%

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