Question

Consider the following information for Watson Power Co.: Debt: Common stock: 4,000 6 percent coupon bonds outstanding, $1,000 par value, 18 years to maturity, selling for 105 percent of par; the bonds make semiannual payments. 96,000 shares outstanding, selling for $56 per share; the beta is 1.13. 13,000 shares of 5.5 percent preferred stock outstanding, currently selling for $107 per share. 7.5 percent market risk premium and 5 percent risk-free rate. Preferred stock: Market: Assume the company's tax rate is 32 percent. Find the WACC. Multiple Choice 8.6% O 9.1%

Answer 1

rate positively ..

	Rate of equity =
		Using CAPM rate of equity = Risk free rate + market risk premium * beta
					=5%+7.5%*1.13
					13.4750%
	Rate of debt (after tax)
	we have to use financial calculator to compute YTM
	Put in calcualtor
	PV		-1050
	FV		1000
	PMT	1000*6%/2	30
	N		36
	Compute I	2.78%
	YTM =		5.56%
	tax rate =		32%
	therefore rate of debt (after tax) =		3.78%
	rate of debt (after tax) =	3.78%
	rate of preferred stock = Annual dividend/Current price
			=5.5/107
			5.14%
Working for rest of question
Computation of Weight and WACC
			Market value			weight	Cost of capital	weight * cost
	Source
	equity		5376000	=96000*56	49.02%	13.48%	6.61%
	debt		4200000	=4000*1000*105%	38.30%	3.78%	1.45%
	preferred stock	1391000	=13000*107	12.68%	5.14%	0.65%
			10967000					8.70%
Ans =	8.7%