Question

Consider the following information for Evenflow Power Co.,

  

Debt:		3,000 6.5 percent coupon bonds outstanding, $1,000 par value, 18 years to maturity, selling for 103 percent of par; the bonds make semiannual payments.
Common stock:		75,000 shares outstanding, selling for $62 per share; the beta is 1.05.
Preferred stock:		9,000 shares of 5.5 percent preferred stock outstanding, currently selling for $105 per share.
Market:		8 percent market risk premium and 4.5 percent risk-free rate.

  

Assume the company's tax rate is 32 percent.

  

Required:

  

Find the WACC.

Answer 1

Before tax cost of debt: 6.22% RATE(18*2,1000*6.5%/2,-1030,1000)*2 after tax cost of debt: 4.23% before tax cost x 1-tax rate (6.22%*(1-0.32)) Cost of equity: = risk free rate + beta x market premium 12.90% 0.045+(1.05*0.08) Cost of preferred stock: annual dividend/current market price 5.24% [ 5.5/105] After tax WACC: Market value Particulars amount weight cost weighted cost Debt $3,090,000 0.3558 4.23% 0.01505 Preferred stock $945,000 0.1088 5.24% 0.00570 Equity $4,650,000 0.5354 12.90% 0.06907 Total market value $8,685,000 8.98% WACC