Given the following information for Evenflow Power Co., the WACC is percent. Ass
ID: 2702241 • Letter: G
Question
Given the following information for Evenflow Power Co., the WACC is percent. Assume the company's tax rate is 32 percent. Round your answer to 2 decimal places.
2,500 7.5 percent coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 103 percent of par; the bonds make semiannual payments.
52,500 shares outstanding, selling for $58 per share; the beta is 1.2.
8,500 shares of 6.5 percent preferred stock outstanding, currently selling for $106 per share.
9.5 percent market risk premium and 6 percent risk-free rate.
Given the following information for Evenflow Power Co., the WACC is percent. Assume the company's tax rate is 32 percent. Round your answer to 2 decimal places.
Explanation / Answer
Semi-annual yield of bond can be calculated in Excel as =RATE(20*2,-75/2,1030,-1000). This is equal to 3.61%. So annual yield = 3.61%*2 = 7.21%
Post tax cost of debt = 7.21%*(1-tax rate) = 7.21%*(1-32%) = 4.91%
Cost of equity = 6%+1.2*9.5% = 17.4%
Cost of preferred equity = 6.5/106 = 6.13%
Market value of debt = 2500*1030 = 2,575,000
MArket value of common stock = 52,500*58 = 3,045,000
Market value of preferred stock = 8500*106 = 901,000
Total market value = 2,575,000+3,045,000+901,000 = 6,521,000
WACC = 2,575,000/6,521,000*4.91% + 3,045,000/6,521,000*17.4% + 901,000/6,521,000*6.13% = 10.91%
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