You are given the following information for Lightning Power Co. Assume the compa
ID: 2720099 • Letter: Y
Question
You are given the following information for Lightning Power Co. Assume the company’s tax rate is 35 percent.
9,000 7.0 percent coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 106 percent of par; the bonds make semiannual payments.
20,000 shares of 4 percent preferred stock outstanding, currently selling for $80 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))
You are given the following information for Lightning Power Co. Assume the company’s tax rate is 35 percent.
Explanation / Answer
Answer :
Calculation of cost of equity capital : Risk free rate + Beta (Market risk premium)
= 0.05+1.03(0.09)
=0.05+0.0927
=0.1427 or 14.27%
After Tax Cost of debt = (70/1060)*(1-0.35)
= 0.043 or 4.3%
Cost of preference share assuming par rate of 100 = (4/80)
=0.05 or 5%
Total equity Capital = 420000*60
= 25,200,000
Total of preference share capital = 20000*80
=1,600,000
Total of Debt = 9000*1060
=9540000
36340000
WACC = Cost of equity * weight of equity + Cost of debt * Weight of debt + Cost of preference share * weight
= 0.1427* 0.6935+0.043*0.263+0.05*0.044
= 0.1125 or 11.25%
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