Question

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

  

Debt:	19,000 4.7 percent coupon bonds outstanding, $2,000 par value, 22 years to maturity, selling for 104 percent of par; the bonds make semiannual payments.
Common stock:	415,000 shares outstanding, selling for $65 per share; the beta is .90.
Market:	7 percent market risk premium and 3 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

Calculating Cost of Debt,

Using TVM Calculation,

I = [FV = 2,000, T = 44, PMT = 47, PV = 2,080]

I = 4.41%

Cost of Debt = 4.41%

Calculating Cost of Equity,

Using CAPM Model,

Required Rate = 0.03 + 0.90(0.07)

Cost of Equity = 9.30%

Value of Debt = 2080(19,000) = $39,520,000

Value of Equity = 65(415,000) = $26,975,000

Weight of Debt = 39,520,000/(39,520,000 + 26,975,000) = 0.5943

Weight of Equity = 1 - 0.5943 = 0.4057

WACC = 0.5943(1 - 0.22)(0.0441) + 0.4057(0.093)

WACC = 5.82%