Question

3. Given the following information for Huntington Power Co., find the WACC. Assume the tax rate is 21%. a) Firm has 4,000 bonds with par value of $1,000, which are currently trading at $1,030 and has a maturity of 20 years. This bond makes semi-annual coupon payments of 7 percent.. b) Firm has 90,000 common shares outstanding, which are currently trading at $57 per share. Beta of the stock is 1.10. Market risk premium is 8 percent and risk-free rate is 6 percent. c) Firm has 13,000 preferred stock that pays $6 dividend. The current price of preferred stock is $104.

Answer 1

Before tax cost of debt: 6.72% RATE(20*2,1000*7%/2,-1030,1000) *2 after tax cost of debt: 5.31% before tax cost x 1-tax rate (6.72%*(1-0.21)) Cost of equity: = risk free rate + beta x market premium 14.80% 0.06+(1.1*0.08) Cost of preferred stock: annual dividend/current market price 5.77% 6/104 After tax WACC: Market value Particulars amount weight cost weighted cost Debt $4,120,000 0.3886 5.31% 0.02065 Preferred stock $1,352,000 0.1275 5.77% 0.00736 Equity $5,130,000 0.4839 14.80% 0.07161 Total market value $10,602,000 9.96% WACC