Question

You are given the following information for Huntington Power Co. Assume the company's tax rate is 23 percent. Debt: 28,000 4.7 percent coupon bonds outstanding, $2,000 par value, 23 years to maturity, selling for 103 percent of par; the bonds make semiannual payments. Common stock: 460,000 shares outstanding, selling for $74 per share; the beta is 1.08. Market: 7 percent market risk premium and 3.9 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

MV of equity=Price of equity*number of shares outstanding

MV of equity=74*460000

=34040000

MV of Bond=Par value*bonds outstanding*%age of par

MV of Bond=2000*28000*1.03

=57680000

MV of firm = MV of Equity + MV of Bond

=34040000+57680000

=91720000

Weight of equity = MV of Equity/MV of firm

Weight of equity = 34040000/91720000

W(E)=0.3711

Weight of debt = MV of Bond/MV of firm

Weight of debt = 57680000/91720000

W(D)=0.6289

Cost of equity

As per CAPM

Cost of equity = risk-free rate + beta * (Market risk premium)

Cost of equity% = 3.9 + 1.08 * (7)

Cost of equity% = 11.46

Cost of debt

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =23x2

2060 =∑ [(4.7*2000/200)/(1 + YTM/200)^k]     +   2000/(1 + YTM/200)^23x2

k=1

YTM = 4.4894972824

After tax cost of debt = cost of debt*(1-tax rate)

After tax cost of debt = 4.4894972824*(1-0.23)

= 3.456912907448

WACC=after tax cost of debt*W(D)+cost of equity*W(E)

WACC=3.46*0.6289+11.46*0.3711

WACC =6.43%