Question

You are given the following information for Huntington Power Co. Assume the company’s tax rate is 24 percent. Debt: 29,000 4.8 percent coupon bonds outstanding, $2,000 par value, 24 years to maturity, selling for 102 percent of par; the bonds make semiannual payments. Common stock: 465,000 shares outstanding, selling for $75 per share; the beta is 1.09. Market: 8 percent market risk premium and 4 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.)

Answer 1

45 DEBT (semi-annual) EQUITY 46 47 Number of bonds outstanding 48 Coupon rate 49 Par Value 50 Current Price 51 Tenure of bond 52 tax rate 53 54 VALUE OF DEBT 29000 5% $2,000 $2.040 24 24% Number of shares outstanding Share Price Beta Risk-free rate (RA) Market risk premium (MRP) 465000 $75 1.09 4.0% 8.00% $59,160,000 VALUE OF EQUITY $34,875,000 TOTAL CAPITAL $94,035,000 Weight of Debt 0.6291 Weight of Equity 0.3709 Calculation of Cost of Debt Calculation of Cost of Equity nper 12.72% Cost of Equity (Rf + (Beta MRP) pmt 48 $48 $2,040 $2,000 65 66 pv fv Semi-annual YTM 2.33% Annual YTM 4.66% Cost of Debt 3.54% 75 WACC 6.95%

FORMULA SHEET DEBT (semi-annual) EQUITY 465000 Number of bonds outstanding Coupon rate Par Value Current Price Tenure of bond tax rate 29000 0.048 2000 =P49*102% Number of shares outstanding Share Price Beta Risk-free rate (RF) Market risk premium (MRP) 1.09 0.04 0.08 0.24 VALUE OF DEBT 1=P47*P50 VALUE OF EQUITY =S47*S48 TOTAL CAPITAL =P54+S54 Weight of Debt =P54/P56 Weight of Equity =S54/P56 Calculation of Cost of Debt Calculation of Cost of Equity =S50+S49*S51) Cost of Equity (Rf+(Beta MRP) nper 64 pmt 65 pv 66 fv =P51*2 =P49*P48*0.5 =P50 =P49 68 Semi-annual YTM =RATE(P63.P64.-P65 P66) Annual YTM =P68*2 Cost of Debt =P70*(1-P52) WACC =(P58*P72)+(S58*S63)