Question

Consider the following information for Evenflow Power Co.,

  

Debt:		5,500 7.5 percent coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 102 percent of par; the bonds make semiannual payments.
Common stock:		126,500 shares outstanding, selling for $62 per share; the beta is 1.05.
Preferred stock:		17,000 shares of 7 percent preferred stock outstanding, currently selling for $103 per share.
Market:		9 percent market risk premium and 7 percent risk-free rate.

  

Assume the company's tax rate is 34 percent.

  

Required:

  

Find the WACC. (Do not round your intermediate calculations.)

rev: 09_20_2012

11.05%

10.95%

11.97%

11.13%

11.45%

Answer 1

There are three sources of capital given in the question .......... (1) Debt , (2) Common stock and (2) Prefered stock

Rd = cost of debt = YTM of that debt issue. For computing this YTM we can use the YTM calculator or use trail and error method.

YTM using YTM calculator = 3.65 * 2 = 7.3 %

Re = Cost of common stock = Rf + Beta * ( Rm - Rf) = 7 + 1.05 (9 ) = 16.45

Rp = Cost of preffered stock = Dividend / Market price * 100 = 7 / 103 * 100 = 6.80

WACC = Rd (D/V) + Re (E/V) + Rp (P/V)

V = total firm value in dollars, E = common stock value = 126500 *62 , D = Debt value in dollars 5500 * 1020

and P = Preffered stock value = 17000 * 103

= 7.3 *(1 - 0.34) * (5610000/15204000)+ 16.45*(7843000/15204000) + 6.8 (1751000/15204000)

= 1.78 + 8.49 + 0.78

= 11.05 ....................... Option - A