Question

# Given the following information for Framingham Power Co., find the WACC. Assume the company’s tax rate...

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=

Face value = \$10,000,000

Coupon = 0.06 * 10,000,000 = 600,000

Price = 0.92 * 10,000,000 = 9,200,000

Yield to maturity = 6.666%

Keys to use in a financial calculator: FV 10,000,000, PV -9,200,000, PMT 600,000, N 25, CPT I/Y

Market value of common stock = 200,000 * 49 = 9,800,000

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

Cost of equity = 4% + 1.4 (8%)

Cost of equity = 15.2%

Total market value of capital structure = 9,200,000 + 9,800,000 = 19,000,000

WACC = Weight of debt*after tax cost of debt + weight of equity*cost of equity

WACC = (9,200,000/19,000,000)*0.0666*(1 - 0.35) + (9,800,000/19,000,000)*0.152

WACC = 0.020961 + 0.0784

WACC = 0.0994 or 9.94%

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