Given the following information tor Electric Transport, find the WACC. Assume th

Question

Given the following information tor Electric Transport, find the WACC. Assume the company's tax rate is 34 percent. Debt: 7,500, 8.4 percent coupon bonds outstanding. $1,000 par value, 22 years to maturity, selling for 103 percent of par, the bonds make semiannual payments. Common stock: 195,000 shares outstanding, selling for $78 per share, beta is 1 .21. Preferred stock: 11,000 shares of 6.35 percent preferred stock outstanding, currently selling for $76 per share. Market: 8 percent market risk premium and 5.1 percent risk-free rate. 11.49 percent 12.07 percent 12.42 percent 13.33 percent 13.80

Explanation / Answer

Re=Rf+Beta(RM-Rf)

Rm=Return on market'

Rf=Risk free return

R e = 0.051 + 1.21(0.08) = 0.1478

RP=Dividend/Price

R P = $6.35/$76 = 0.083553

Rd=Interest+Fairvalue-Expected value/No.of yearsmaturity

Fairvalue+expeted value

2

Rd=(360000+(7725000-7500000)/22)/(7725000+7500000)/2=.081056

WACC = ($15,210,000/$23,771,000)(0.1478) + ($836,000/$23,771,000)(0.083553) + ($7,725,000/ $23,771,000)((0.081056)(1 - 0.34) = 11.49 percent

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