Question

Consider the following information for Evenflow Power Co.,

  

Debt:		5,000 9 percent coupon bonds outstanding, $1,000 par value, 17 years to maturity, selling for 103 percent of par; the bonds make semiannual payments.
Common stock:		105,000 shares outstanding, selling for $60 per share; the beta is 1.17.
Preferred stock:		17,500 shares of 7.5 percent preferred stock outstanding, currently selling for $105 per share.
Market:		10 percent market risk premium and 7 percent risk-free rate.

  

Assume the company's tax rate is 31 percent.

  

Required:

  

Find the WACC.

Multiple Choice

• 12.31%

• 13.21%

• 12.07%

• 12.57%

• 12.17%

Answer 1

Particulare	value	Weight	Cost of capital	weight * cost of capital
Bond	5150000	0.387582	6%	2.32%
Equity	6300000	0.47413	19%	8.87%
Prefered stock	1837500	0.138288	7%	0.99%
	13287500			12.17%

Answer is 12.17%

workings

cost of equity =rf +beta*(market risk premium)==7%+1.17*10% =19%

cost of prefered stock =dividend / marketprice ==7.5/105=7%

cost of debt =after tax yield of bond

NPER=17*2

PMT=1000*9%/2

PV=1000*103%

FV=1000

=(RATE(17*2,1000*9%/2,-1000*1.03,1000,0)*2)

=9%

after tax cost of debt =9%*(1-31%)=6%

Particulare	value
Bond	=1000*103%*5000
Equity	=105000*60
Prefered stock	=17500*105