nect.mheducation.com/flow/connect html #3 Saved You are given the following info
ID: 2808852 • Letter: N
Question
nect.mheducation.com/flow/connect html #3 Saved You are given the following information for Watson Power Co. Assume the company's tax rate is 23 percent 8,000 5.7 percent coupon bonds outstanding, $1,000 par value, 23 years to maturity, selling for 105 percent of par, the bonds make semiannual payments. Debt Common stock: 410,000 shares outstanding, selling for $59 per share; the beta is 1.10. Preferred 17,500 shares of 3.5 percent preferred stock outstanding, currently stock selling for $80 per share. The par value is $100 per share. Market 7 percent market risk premium and 4.5 percent risk-free rate. What is the company's WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) WACC Prev 6 of 6 DOLLExplanation / Answer
Particulars
Price
Quantity
Price x Quantity
Weight
Equity
$59.00
410,000.00
24,190,000.00
71.167991%
Debt
$1,050.00
8,000.00
8,400,000.00
24.713151%
Preferred
$80.00
17,500.00
1,400,000.00
4.118858%
Total
33,990,000.00
Cost of debt:
Using financial calculator BA II Plus - Input details:
#
FV = Future Value =
-$1,000.00
PV = Present Value =
$1,050.00
N = Total number of periods = Number of years x frequency =
46
PMT = Payment = Coupon / frequency =
-$28.50
CPT > I/Y = Rate per period or YTM per period =
2.66029
Convert Yield in annual and percentage form = Yield*frequency / 100 =
5.320570%
Cost of preference:
Preference share cost:
#
Dividend = D =
3.50
Price of preference = P
80.00
Flotation cost = f =
0.00
Formula for calculating the Expected rate:
Preferred cost = (D/(P-f) =
4.3750%
Cost of equity:
Cost of equity = Risk free rate + Beta x (Market rate - Risk free rate)
Cost of equity = 4.5% + 1.1 x (7% - 4.5%)
Cost of equity = 7.25%
---
WACC = Cost of equity x Weight of equity + Cost of preferred share x Weight of preferred share + Cost of debt x Weight of debt x (1-Tax rate)
WACC = 7.25% x 71.167991% + 4.3750% x 4.118858% + 5.320570% x 24.713151% x (1-23%)
WACC = 6.35%
Particulars
Price
Quantity
Price x Quantity
Weight
Equity
$59.00
410,000.00
24,190,000.00
71.167991%
Debt
$1,050.00
8,000.00
8,400,000.00
24.713151%
Preferred
$80.00
17,500.00
1,400,000.00
4.118858%
Total
33,990,000.00
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