Question

# Given the following information for Watson Power Co., find the WACC. Assume the company tax rate...

Given the following information for Watson Power Co., find the WACC. Assume the company tax rate is 35 percent. Debt: 10,000 bonds with coupon rate of 7 percent. \$1,000 par value, 30 years to maturity, selling for 104 percent of par (meaning it’s current price is \$1,040). The bonds make semiannual coupon payments. Floatation cost is \$8. Preferred stock: 35,000 shares of preferred stock outstanding currently pay \$3.50 per share dividends, sell for \$72 per share with floatation cost of \$2. Common stock: 480,000 shares outstanding, selling for \$62 per share; the beta is 1.15. Market: 8 percent market risk premium and 3.5 percent risk-free rate.

 Particulars Cost % Market value Weights WACC ( Cost % * Weights ) Common equity 12.70% \$ 29,760,000 0.6973 8.86% ( 3.5% + 1.15 * 8% ) ( 480,000 *62 ) Debt 4.39% \$ 10,400,000 0.2437 1.07% [ =RATE(30*2,70/2,-1032,1000,0)*2*(1-35%) ] ( 10,000 * 1040 ) Preferred stock 5.00% \$ 2,520,000 0.0590 0.30% [ 3.5 / ( 72 -2 ) ] ( 35,000 * 72 ) Total \$ 42,680,000 1.0000 10.23%

Therefore, The Weighted average cost of capital is 10.23%.

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