Question

The required data is:

Information on Janicek Power Co., is shown below. Assume the company’s tax rate is 35 percent.

Debt:	8,500 7.2 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 118 percent of par; the bonds make semiannual payments.
Common stock:	225,000 shares outstanding, selling for $87 per share; beta is 1.15.
Preferred stock:	15,000 shares of 4.8 percent preferred stock outstanding, currently selling for $98 per share.
Market:	7 percent market risk premium and 3.1 percent risk-free rate.

***I calcualted market value of debt as $10,030,000, market value of common stock as $19,575,000 and market value of preferred stock as $1,470,000 for total value of $31,075,000. I then calculated weights of each as .3228, .6299 and .0473 respectfully but how do I get the correct WACC?

Required:

Calculate the company's WACC. (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

I am trying to calculate the WACC for the Janicek Power question. I am entering the final answer I got which was 6.77 (I have to round to 2 decimal places). But it is showing as incorrect when I check it I the homework assignment

Answer 1

cost of equity=risk free rate+beta*market risk premium

=3.1%+1.15*7%

=11.15%

cost of preferred share=annual dividend/current price of preferred share

=(100*4.8%)/98

=4.90%

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

cost of debt before tax=(RATE(25*2,1000*7.2%/2,-1000*118%,1000))*2

=5.82%

value of equity is=225000*87=19575000

value of preferred share=15000*98=1470000

value of debt is=8500*1000*118%=10030000

WACC=(19575000/(19575000+1470000+10030000))*11.15%+(1470000/(19575000+1470000+10030000))*4.90%+(10030000/(19575000+1470000+10030000))*5.82%*(1-35%)

=8.48%

the above is answer..