Question

You are given the following information for Huntington Power Co. Assume the company’s tax rate is 23 percent.

  

Debt:	28,000 4.7 percent coupon bonds outstanding, $2,000 par value, 23 years to maturity, selling for 103 percent of par; the bonds make semiannual payments.
Common stock:	460,000 shares outstanding, selling for $74 per share; the beta is 1.08.
Market:	7 percent market risk premium and 3.9 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

Step-1:Calculation of weight of each component of capital
Market value of:
Debt	28,000	*	$             2,000	*	103%	=	$       5,76,80,000
Equity	4,60,000	*	$                   74			=	$       3,40,40,000
Total							$       9,17,20,000
So, weight of:
Debt	$ 5,76,80,000	/	$ 9,17,20,000	=	0.6289
Equity	$ 3,40,40,000	/	$ 9,17,20,000	=	0.3711
Total					1.0000
Step-2:Calculation of cost of each component of capital
Before tax cost of debt		=	=RATE(nper,pmt,pv,fv)*2			Where,
		=	4.49%			nper	46
						pmt	$                   47.00
						pv	$            -2,060.00
						fv	$             2,000.00
After tax cost of debt		=	Before tax cost of debt*(1-Tax rate)
		=	4.49%	*(1-0.23)
		=	3.46%
Cost of equity		=	Risk free rate + Beta *market risk premium
		=	3.9%+1.08*7%
		=	11.46%
Step-3:Calculation of WACC
			Weight	Cost	Weighted Cost
			a	b	a*b
	Debt		0.6289	3.46%	2.17%
	Equity		0.3711	11.46%	4.25%
	WACC				6.43%
So,
WACC is	6.43%