Question

Given the following information for Cleen Power Co., find the WACC. Assume the company's tax rate is 35%

Debt: 7,000 6% coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 105% pf par; the bonds make semiannual payments

Common Stock: 180,000 shares outstanding, selling for $58 per share; the beta is 1.10

Market: 6.5% market risk premium and 4.3% risk-free rate.

**Required:**

**1. Find the market value of each type of
financing**

Bonds =

Stock =

Total Value of Firm =

**2. Use the CAPM to find the cost of equity**

CAPM: Rs = Rf + β * (Rm - Rf)

Rf =

β =

Rm - Rf =

Cost of Equity =

**3. Calculate the cost of debt (after-tax
YTM)**

PV

Periods

Payment

FV

YTM =

After tax cost =

**4. Calculate the WACC for the company**

Debt Weighting

Equity Weighting

WACC =

Answer #1

1)

Market value of bond = 7000 * (1.05 * 1000) = $7,350,000

Market value of stock = 180,000 * 58 = $10,440,000

Total value of firm = 7,350,000 + 10,440,000 = $17,790,000

2)

Risk free = 4.3%

Beta = 1.1

RM - RF = 6.5%

Cost of equity = risk free rate + beta ( market risk premium)

Cost of equity = 0.043 + 1.1 ( 0.065)

Cost of equity = 0.1145 or 11.45%

3)

PV = 1000 * 1.05 = $1,050

Periods = 20 * 2 = 40

payment = 0.06 * 1000 = 60 / 2 = 30

FV = 1000

YTM using a financial calculator = 5.58%

( keys to use in a financial calculator:2nd I/Y 2, FV 1000, PV -1050, N 40, PMT 30, CPT I/Y

After tax cost = 0.0558 ( 1 - 0.35) = 0.03627 or 3.627%

4)

Debt weighting = 7,350,000 / 17,790,000 = 0.4132

equity weighting = 10,440,000 / 17,790,000 = 0.5868

WACC = 0.4132 * 0.03627 + 0.5868 * 0.1145

WACC = 0.014987 + 0.067189

WACC = 0.08218 or 8.218%

Calculating
WACC
Given the following information for Cleen Power Co., find the
WACC. Assume the company's tax rate is
35%
Debt: 7,000 6% coupon bonds outstanding, $1,000 par value, 20
years to maturity, selling for 105% pf par; the bonds make
semiannual
payments
Common Stock: 180,000 shares outstanding, selling for $58 per
share; the beta is
1.10
Market: 6.5% market risk premium and 4.3% risk-free rate.
Required:
1. Find the market value...

Given the following information for Magrath Power Co., find the
WACC. Assume the company's tax rate is 35 percent. Debt: 10,000
with 6.4%coupon bonds outstanding, $1,000 par value, 25 years to
maturity, selling for 108 percent of par; the bonds make semiannual
payments. Common stock: 495,000 shares outstanding, selling for $63
per share; the beta is 1.15. Preferred stock: 35,000 shares of 3.5%
preferred stock outstanding, currently selling for $72 per share.
Market: 7% market risk premium and 3.2 percent...

Given the following information for Williams Power Co., find the
WACC. Assume the company’s tax rate is 21 percent. Debt: 75,000
bonds with a 5.8 percent coupon outstanding, $1,000 par value, 15
years to maturity, selling for 105 percent of par; the bonds make
semiannual payments.
Common stock: 925,000 shares outstanding, selling for $72 per
share; the beta is .99.
Preferred 65,000 shares of 2.8 percent preferred stock
outstanding, currently stock: selling for $50 per share. Assume par
value is...

Given the following information for Framingham Power Co., find
the WACC. Assume the company’s tax rate is 35 percent. Debt:
$10,000,000 6 percent coupon bonds outstanding, 25 years to
maturity, selling for 92 percent of par; the bonds make annual
payments. Common Stock: 200,000 shares outstanding, selling for $49
per share; the beta is 1.4. Market: 8 percent market risk premium
and 4 percent risk-free rate.
WACC=

Given the following information for Watson Power Co., find the
WACC. Assume the company tax rate is 35 percent. Debt: 10,000 bonds
with coupon rate of 7 percent. $1,000 par value, 30 years to
maturity, selling for 104 percent of par (meaning it’s current
price is $1,040). The bonds make semiannual coupon payments.
Floatation cost is $8. Preferred stock: 35,000 shares of preferred
stock outstanding currently pay $3.50 per share dividends, sell for
$72 per share with floatation cost of...

12. Given the following information for Watson Power Co.,
find the WACC. Assume the company’s tax rate is 35
percent.
Debt: 10,000 6.4 percent coupon bonds outstanding, $1,000 par
value, 25 years to maturity, selling for 108 percent of par; the
bonds make semiannual payments.
Common stock: 495,000 shares outstanding, selling for $63 per
share; the beta is 1.15.
Preferred stock: 35,000 shares of 3.5 percent preferred stock
outstanding, currently selling for $72 per share. Market: 7 percent
market risk...

Given the following information for Versa Company, find its
WACC. Assume the company s tax rate is 25 percent. Debt: 40,000, 5
percent coupon bonds outstanding, $1,000 par value, 10 years to
maturity, selling for 101 percent of par; the bonds make semiannual
coupon payments. Common stock: 420,000 shares outstanding, selling
for $44 per share; the beta is 1.68. Market: 7.0 percent market
risk premium and 3.5 percent risk-free rate. (Hint: Determine the
cost of debt as YTM then use...

Given the following information for Lightning Power Co.,
find the WACC. Assume the company’s tax rate is 35
percent.
Debt: 8,000 bonds outstanding, selling for $1,060 and yield to
maturity 7%
Common Stock: 310,000 shares outstanding, selling for $77 per
share; the Beta is 1.15.
Preferred stock: 15,000 shares of preferred stock outstanding,
currently selling for $60 per share. The preferred stock pays an
annual fixed dividend of $4.
Market: 7 percent market risk premium and 4.5 percent risk-free
rate.

Information on Gerken Power Co., is shown below. Assume the
company’s tax rate is 34 percent.
Debt:
9,600 9.1 percent coupon bonds outstanding, $1,000 par value, 24
years to maturity, selling for 98.5 percent of par; the bonds make
semiannual payments.
Common stock:
221,000 shares outstanding, selling for $84.10 per share; beta
is 1.26.
Preferred stock:
13,100 shares of 5.8 percent preferred stock outstanding,
currently selling for $96.90 per share.
Market:
7.05 percent market...

Given the following information for Tribune Corporation, find
the WACC. Assume the company s tax rate is 25 percent. Debt: 18,000
bonds outstanding, 6 percent coupon, $1,000 par value, 10 years to
maturity, selling for 98 percent of par; the bonds make semiannual
coupon payments. Common stock: 250,000 shares outstanding, selling
for $30 per share; the beta is 1.60. Market: 7 percent market risk
premium and 4.0 percent risk-free rate. 6.97% 7.26% 7.53% 7.84%
8.17%

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 12 minutes ago

asked 23 minutes ago

asked 23 minutes ago

asked 24 minutes ago

asked 34 minutes ago

asked 35 minutes ago

asked 36 minutes ago

asked 36 minutes ago

asked 40 minutes ago

asked 54 minutes ago

asked 1 hour ago

asked 1 hour ago