Question

11

You are given the following information for Huntington Power Co. Assume the company’s tax rate is 22 percent.

  

Debt:	31,000 5 percent coupon bonds outstanding, $2,000 par value, 21 years to maturity, selling for 105 percent of par; the bonds make semiannual payments.
Common stock:	475,000 shares outstanding, selling for $77 per share; the beta is 1.11.
Market:	7 percent market risk premium and 4.2 percent risk-free rate.

What is the company's WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Answer 1

Coupon = (0.05 * 2000) / 2 = 50

Number of periods = 21 * 2 = 42

Price = 1.05 * 2000 = 2,100

YTM = 4.6253%

Keys to use in a financial calculator: 2nd I/Y 2, FV 2000, PMT 50, N 42, PV -2100, CPT I/Y

Cost of equity = Risk free rate + beta(market risk premium)

Cost of equity = 0.042 + 1.11 (0.07)

Cost of equity = 0.1197 or 11.97%

Total market value of debt = 31,000 * 2,100 = 65,100,000

Total market value of common equity = 475,000 * 77 = 36,575,000

total market value = 65,100,000 + 36,575,000 = 101,675,000

WACC = (65,100,000 / 101,675,000)*0.046253*(1 - 0.22) + (36,575,000 / 101,675,000)*0.1197

WACC = 0.0231 + 0.04306

WACC = 0.0662 or 6.62%