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 40 percent.

  Debt:

5,000 7.8 percent coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 107 percent of par; the bonds make semiannual payments.

  Common stock:

500,000 shares outstanding, selling for $68 per share; the beta is 1.11.

  Market:

9 percent market risk premium and 5.80 percent risk-free rate.

What is the company's WACC? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))

You are given the following information for Huntington Power Co. Assume the company’s tax rate is 40 percent.

Explanation / Answer

cost of equity = risk-free rate + beta * (market risk premium)

= 5.8+1.11*9 = 15.79%

K =Nx2         
BOND PRICE= [(Semi-annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^(Nx2)
                   k=1

                    K= 20x2          
1070 = [(7.8*1000/(100*2))/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^20x2
                   k=1

YTM = 7.137%

MV of debt = number of bonds outstanding* percent of pat * par value

   = 5000*1.07*1000 = 5350000

MV of equity = outstanding shares* price = 500000*68 = 34000000

WACC = MV of debt*cost of debt*(1-tax rate)/(MV of equity+MV of debt)+MV of equity*cost of equity/(MV of debt + MV of equity)

=5350000*7.137*(1-04)/(5350000+34000000)+34000000*15.79/(5350000+34000000) = 10.73%

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