Question

Consider the following information for Evenflow Power Co.,

  

Debt:		5,500 7.5 percent coupon bonds outstanding, $1,000 par value, 21 years to maturity, selling for 105 percent of par; the bonds make semiannual payments.
Common stock:		126,500 shares outstanding, selling for $58 per share; the beta is 1.08.
Preferred stock:		16,000 shares of 6.5 percent preferred stock outstanding, currently selling for $106 per share.
Market:		8.5 percent market risk premium and 6 percent risk-free rate.

  

Assume the company's tax rate is 35 percent.

  

Required:

  

Find the WACC. (Do not round your intermediate calculations.)

Answer 1

Market Value of Debt = 1050*5500 = 5775000
Number of Periods = 21*2 =42
Coupon = 7.5%*1000/2 = 37.5
If Par value is 1000 then Price = 105%*1000 = 1050
Calculating YTM using Excel Formula = 2* RATE(42,37.5,-1050,1000) = 7.0405%

Market value of common Stock = 126500*58 = 7337000
Cost of Equity = Risk Free rate + Beta * (Market Return - Risk Free Rate) = 6% + 1.08*8.5% = 15.18%

Market Value of Preferred Stock = 106*16000 = 1696000
Cost of Preferred Stock = 6.5%

Total Value = 5775000 +  7337000 + 1696000 = 14,808,000

WACC = Cost of Debt*(1-Tax rate)*Debt/Total value + Cost of Equity * weight of Equity + Cost of Preferred Stock * weight of Preferred Stock = 7.0405%*(1-35%)*5775000/14808000+15.18%*7337000/14808000+ 6.5%*1696000/14808000 = 10.05%


WACC = 10.05%

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