Question

You are given the following information for Lightning Power Co. Assume the company’s tax rate is 40 percent. Debt: 8,000 7.5 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 104 percent of par; the bonds make semiannual payments. Common stock: 470,000 shares outstanding, selling for $65 per share; the beta is 1.08. Preferred stock: 25,000 shares of 3 percent preferred stock outstanding, currently selling for $85 per share. Market: 8 percent market risk premium and 5.50 percent risk-free rate.

Answer 1

market value of debt=8000*1000*104%=8320000

market value of equity=470000*65=30550000

market value of preference shares=25000*85=2125000

cost of equity=5.50%+1.08*8%=14.14%

cost of preferred stock=3/85=3.53%

for cost of debt,use financial calculator as

PV=-1000*104%=-1040

FV=1000

PMT=1000*7.5%/2=37.50

N=25*2=50

Click CPT

Click I/Y=3.5771%

Cost of debt=3.5771%*2=7.15%

WACC=(30550000/(30550000+8320000+2125000))*14.14%+(8320000/(30550000+8320000+2125000))*7.15%*(1-40%)+(2125000/(30550000+8320000+2125000))*3.53%

=11.59%

the above is answer..