Question

12. Given the following information for Watson Power Co., find the WACC. Assume the company’s tax rate is 35 percent.

Debt: 10,000 6.4 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 108 percent of par; the bonds make semiannual payments.

Common stock: 495,000 shares outstanding, selling for $63 per share; the beta is 1.15.

Preferred stock: 35,000 shares of 3.5 percent preferred stock outstanding, currently selling for $72 per share. Market: 7 percent market risk premium and 3.2 percent risk-free rate.

Answer 1

	Amount	weight	cost	weight*cost
equity	31,185,000.00	0.7007	11.2500%	0.0788
debt	10,800,000.00	0.2427	3.7638%	0.0091
preferred shares	2,520,000.00	0.0566	4.8611%	0.0028
total	44,505,000.00			9.0716%

WACC = 9.07%