Question

Corona SoCo has the following capital structure. 8.5% First Mortgage Bonds – $60,000,000 outstanding. 10% senior sub-ordinated Bonds – $35,000,000 outstanding. Class A preferred stock paying 4.5%, $18,000,000 outstanding. Class B preferred stock paying 6.0%, $15,000,000 outstanding. Common Equity $70,000,000 outstanding paying 12%. Its tax rate is 35%. What is the weighted adjusted rate for the First Mortgage Bonds used in this WACC calculation?

What is Corona SoCo’s WACC?

Corona SoCo is considering the issuance of $20,000,000 project financing bonds for an up-coming capital project. The bonds will be priced at 7%.
What is Corona SoCo’s WACC with this new issue?

Answer 1

Cost of first mortgage bond = coupon rate * (1-t)

= 8.5%*(1-0.35) = 5.525%

Senior subordinated bond = 10%*(1-0.35) = 6.5%

Class A prefferd shares = 4.5%

Class B prefferd shares =6%

Common stock = 12%

New issued bond = 7%*(1+0.35 ) = 4.55%

The weighted average cost of capital calculation shown below:-

WACC Without New Project=SUMPRODUCT(B112:B116,C112:C116)/SUM(C112:C116)

WACC with New Projecr=SUMPRODUCT(B112:B117,C112:C117)/SUM(C112:C117)