Question

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.

Answer 1

Answer :

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%.