Question

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

 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).

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%