You are given the following information for Lightning Power Co. Assume the compa

Question

You are given the following information for Lightning Power Co. Assume the company’s tax rate is 30 percent.

6,000 7.9 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 108 percent of par; the bonds make semiannual payments.

29,000 shares of 4 percent preferred stock outstanding, currently selling for $89 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 30 percent.

Explanation / Answer

Hi,

Please find the detailed answer as follows:

Step 1: Calculate Cost of Debt:

Nper = 30*2 = 60 (indicates the period over which interest payments are made)

PV = 1000*104% = 1040 (indicates the present value of bonds)

FV = 1000 (indicates the face value of bonds)

PMT = 1000*6.8%*1/2 = 34 (indicates the amount of semi-annual interest payment)

Rate = ? (indicates the cost of debt)

After Tax Cost of Debt = Rate(Nper,PMT,PV,FV)*2*(1-Tax Rate) = Rate(60,34,-1040,1000)*2*(1-.38) = 4.03%

Step 2: Calculate Cost of Equity

Cost of Equity = Risk Free Rate + Beta*(Market Risk Premium) = 4.80 + 1.14*(7) = 12.78%

Step 3: Calculate Cost of Preferred Stock

Cost of Preferred Stock = Annual Dividend/Current Selling Price = (100*5%)/78*100 = 6.41%

Step 4: Calculate Weights:

Value of Bonds = 7000*1000*104% = 7280000

Value of Equity = 400000*58 = 23200000

Value of Preferred Stock = 18000*78 = 1404000

Total Value of the Firm = 7280000 + 23200000 + 1404000 = 31884000

Step 5: Calculate WACC

WACC = After Tax Cost of Debt*Weight of Debt + Cost of Preferred Stock*Weight of Preferred Stock + Cost of Equity*Weight of Equity = 4.03*7280000/31884000 + 6.41*1404000/31884000 + 12.78*23200000/31884000 = 10.50%

Answer is 10.50%

Thanks.

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