D. I the artertax Cost ol debt IS . porcon 0 3 15. Finding the WACc. Given the f

Question

D. I the artertax Cost ol debt IS . porcon 0 3 15. Finding the WACc. Given the following information for Gerken Power Co, find the WACC. Assume the company's tax rate is 35 percent. Debt: Common stock: Preferred stock: Market: 15,500 6.4 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 108 percent of par; the bonds make semiannual payments 495,000 shares outstanding, selling for $81 per share; beta is 1.20. 20,000 shares of 4.2 percent preferred stock outstanding, currently selling for $92 per share. 7 percent market risk premium and 3.1 percent risk- free rate.

Explanation / Answer

Before calculating WACC we need to calculate Cost of Debt and equity,

Cost of Debt calculated using formula : Pre-tax cost of firm's bonds or short-term debt (1 - marginal tax rate)

Next need to calculate cost of equity : Risk-free rate + Beta (Market Rate of Return - Risk-Free Rate)

Then we need to multiply the result with equal % i.e. 33% each. and add the costs.

Particulars % WACC in % cost of debt 4.16 1.37 common stock 7.78 2.57 preferred stock stock 3.14 1.04 WACC 4.98

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