You are given the following information for Huntington Power Co. Assume the comp

Question

You are given the following information for Huntington Power Co. Assume the company's tax rate is 35 percent. Debt: 6,000 6.7 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 103 percent of par; the bonds make semiannual payments. Common stock: 390,000 shares outstanding, selling for $57 per share; the beta is 1.13. Market: 6 percent market risk premium and 4.7 percent risk-free rate. What is the company's WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Explanation / Answer

1) Calculation of WACC :

          Calculation of Cost of Debt :

             YTM = (Coupon payment + (Face value - Selling price)/No.of years) / (Face value+Selling price)

                     = (67 + (1000 - 1030)/25) / *(1000+1030)/2

                     = (67 - 1.2)/ 1015

                     = 6.46%   (Approx.)

   After tax cost of debt = 4.20%      **(6.46 - 35%)

   Calculation of Cost of equity :

               Using CAPM Approach :

                            = Risk free rate + Company beta * Market risk premium

                            = 4.7 % + 1.13 * 6%

                            = 11.48%

Total Value of Equity = $22230000     **(390000 * $57)

Total Value of Debt   = $6180000        **(6000 * $1030)

WACC = 11.48% * 22230000 / 28410000 + 4.20% * 6180000 / 28410000

             = 8.982% + 0.913

             = 9.895%

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