Question

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

 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.)

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%

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