You are given the following information for Watson Power Co. Assume the company’
ID: 2760549 • Letter: Y
Question
You are given the following information for Watson Power Co. Assume the company’s tax rate is 38 percent. Debt: 10,000 6.5 percent coupon bonds outstanding, $1,000 par value, 30 years to maturity, selling for 108 percent of par; the bonds make semiannual payments. Common stock: 370,000 shares outstanding, selling for $55 per share; the beta is 1.11. Preferred stock: 15,000 shares of 5 percent preferred stock outstanding, currently selling for $75 per share. Market: 6 percent market risk premium and 4.5 percent risk-free rate. What is the company's WACC?
Explanation / Answer
Before tax cost of debt =2.963% x 2 = 5.926%
After tax cost of debt = Rd x (1-t)
= 5.926% x (1-0.38)
= 3.67%
Cost of equity Ke = Rf +MRP x beta
= 6% + 4.50% x 1.11
= 10.95%
Cost of preferred stock Kp = annual dividend / price
= 100 x 5% / 75
= 6.67%
Source
quantity
price
Amount
weight
cost
weight x cost
debt
10000
1080
10800000
0.334624
3.67%
0.012280713
common stock
370000
55
20350000
0.630519
10.95%
0.069041828
preferred stock
15000
75
1125000
0.034857
6.67%
0.002324942
total
32275000
1
0.083647483
WACC = sum of weight x cost
= 8.36%
Source
quantity
price
Amount
weight
cost
weight x cost
debt
10000
1080
10800000
0.334624
3.67%
0.012280713
common stock
370000
55
20350000
0.630519
10.95%
0.069041828
preferred stock
15000
75
1125000
0.034857
6.67%
0.002324942
total
32275000
1
0.083647483
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.