Information on Gerken Power Co., is shown below. Assume the company’s tax rate is 38 percent. Debt: 9,800 9.3 percent coupon bonds outstanding, $1,000 par value, 22 years to maturity, selling for 97.5 percent of par; the bonds make semiannual payments. Common stock: 223,000 shares outstanding, selling for $84.30 per share; beta is 1.28. Preferred stock: 13,300 shares of 5.9 percent preferred stock outstanding, currently selling for $96.70 per share. Market: 7.15 percent market risk premium and 4.95 percent risk-free rate. Required: Calculate the company's WACC. (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) WACC %
D = DebtmarketValue = number of qty * Face Value * quote (%) = 9800 * $1000 * 97.5% = $9,555,000
E = EquitymarketValue = number of qty * price per share = 223000 * $84.30 = $18,798,900
P = PreferredEquitymarketValue = number of qty * price per share = 13300 * $96.70 = $1,286,110
TC = Total Capital = DebtmarketValue + EquitymarketValue + PreferredEquitymarketValue = 29,640,010
t = tax rate = 38%
rd = Compute I/Y, given FV=1000, PMT=46.5, N=44, PV=-975 => I/Y = 4.787212165
rd = 2 * 4.787212165 = 9.574424331%
re = Rf + Beta * (Risk Premium) = 4.95% + 1.28 * 7.15% = 14.102% {using CAPM}
rpe = $5.9/$96.7 = 6.101344364%
WACC = D/(TC) * rd * (1-t) + E/(TC) * re + P/(TC) * rpe
= [(9555000/29640010)*0.09574424331*(1-0.38)]+[(18798900/29640010)*0.14102]+[(1286110/29640010)*0.06101344364]
= 11.1224% = 11.12% (rounded)
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