Question

Consider the following information for Evenflow Power Co 2,500 8 percent coupon bonds outstanding, $1,000 par value, 21 years to maturity, selling for 103 percent of par, the bonds make semiannual payments 57,500 shares outstanding, selling for $59 per share; the beta Is 1.19 8,000 shares of 7.5 percent preferred stock outstanding, currently selling for $105 per share. 9 percent market risk premlum and 7.5 percent risk-free rate. Debt Common stock: Preferred stock Market Assume the company's tax rate is 33 percent Required: Flnd the WACC. (Do not round your intermediate calculations.)

Answer 1

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

MV of equity=59*57500

=3392500

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

MV of Bond=1000*2500*1.03

=2575000

MV of Preferred equity=Price*number of shares outstanding

MV of Preferred equity=105*8000

=840000

MV of firm = MV of Equity + MV of Bond+ MV of Preferred equity

=3392500+2575000+840000

=6807500

Weight of equity = MV of Equity/MV of firm

Weight of equity = 3392500/6807500

W(E)=0.4983

Weight of debt = MV of Bond/MV of firm

Weight of debt = 2575000/6807500

W(D)=0.3783

Weight of preferred equity = MV of preferred equity/MV of firm

Weight of preferred equity = 840000/6807500

W(PE)=0.1234

Cost of equity

As per CAPM

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

Cost of equity% = 7.5 + 1.19 * (9)

Cost of equity% = 18.21

Cost of debt

K = Nx2

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

k=1

K =21x2

1030 =∑ [(8*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^21x2

k=1

YTM = 7.709364648

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

After tax cost of debt = 7.709364648*(1-0.33)

= 5.16527431416

cost of preferred equity

cost of preferred equity = Preferred dividend/price*100

cost of preferred equity = 7.5/105*100

=7.14

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

WACC=5.17*0.3783+18.21*0.4983+7.14*0.1234

WACC =11.91%