Question

You are given the following information for Watson Power Co. Assume the company’s tax rate is 35 percent.

Debt:	6,000 7.3 percent coupon bonds outstanding, $1,000 par value, 15 years to maturity, selling for 109 percent of par; the bonds make semiannual payments.
Common stock:	450,000 shares outstanding, selling for $63 per share; the beta is 1.06.
Preferred stock:	23,000 shares of 4 percent preferred stock outstanding, currently selling for $83 per share.
Market:	12 percent market risk premium and 5.3 percent risk-free rate.

What is the company's WACC? (Please show work and round to 2 decimal places).

Answer 1

value of debt=6000*1000*109%=6540000

value of equity=450000*63=28350000

value of preferred stock=23000*83=1909000

for cost of debt, use excel formula=RATE(nper,pmt,pv,fv)

=(RATE(15*2,1000*7.3%/2,-1000*109%,1000))*2

=6.36%

cost of preferred stock=(100*4%)/83=4.82%

cost of equity=5.3%+1.06*12%=18.02%

What is the company's WACC=(28350000/(28350000+6540000+1909000))*18.02%+(1909000/(28350000+6540000+1909000))*4.82%+(6540000/(28350000+6540000+1909000))*6.36%*(1-35%)

=14.87%

the above is answer..