You are given the following information for Watson Power Co. Assume the company’
ID: 2763820 • Letter: Y
Question
You are given the following information for Watson Power Co. Assume the company’s tax rate is 40 percent.
8,000 7.5 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 104 percent of par; the bonds make semiannual payments.
25,000 shares of 3 percent preferred stock outstanding, currently selling for $85 per share.
What is the company's WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
You are given the following information for Watson Power Co. Assume the company’s tax rate is 40 percent.
Explanation / Answer
K =Nx2
BOND PRICE= [(Semi-annual Coupon)/(1 + YTM/2)^k] + Par value/(1 + YTM/2)^(Nx2)
k=1
K= 25x2
1040 = [(7.5*1000/(100*2))/(1 + YTM/200)^k] + 1000/(1 + YTM/200)^25x2
k=1
YTM = 7.154%
cost of equity = risk-free rate + beta * (market risk premium) = 5.5+1.08*8 = 14.14%
cost of preferred of equity = preferred equity dividend rate/current price = 3/85 = 3.529%
market value of debt = number of debt outstanding * market price of debt = 8000*1040 = 8320000
market value of equity = number of shares outstanding * market price of shares = 470000*65 = 30550000
market value of preferred equity=number of preferred equity outstanding * market price of preferred equity
= 25000*85 = 2125000
WACC = cost of debt*(1-tax rate)*MV of debt/(MV of debt+MV of equity + MV of preferred equity)+
cost of equity*MV of equity/(MV of debt+MV of equity + MV of preferred equity)+
cost of preferred equity/*MV of preferred equtiy/(MV of debt+MV of equity + MV of preferred equity)
=7.154*(1-0.4)* 8320000/(8320000+30550000+2125000)+14.14*30550000/(8320000+30550000+2125000)+3.529*2125000/(8320000+30550000+2125000)
=11.59%
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