Question

You are given the following information for Lightning Power Co. Assume the company’s tax rate is 24 percent. Debt: 9,000 5.8 percent coupon bonds outstanding, $1,000 par value, 24 years to maturity, selling for 106 percent of par; the bonds make semiannual payments. Common stock: 420,000 shares outstanding, selling for $60 per share; beta is 1.11. Preferred stock: 18,000 shares of 3.6 percent preferred stock outstanding, currently selling for $81 per share. The par value is $100 per share. Market: 5 percent market risk premium and 4.6 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

	Cost of equity =
		Using CAPM rate of equity = Risk free rate + market risk premium * beta
					=4.6%+5%*1.11
					10.15%
	Rate of debt (after tax)
	we have to use financial calculator to compute YTM
	Put in calcualtor
	PV		-1060	-1000*106%
	FV		1000
	PMT	1000*5.8%/2	29
	N	24*2	48
	Compute I		2.68%
	YTM =2.68%*2		5.35%
	tax rate =		24%
	therefore rate of debt (after tax) = 5.35%*(1-24%)					4.07%
	rate of debt (after tax) =			4.07%
	rate of preferred stock = Annual dividend/Current price
			=3.6/81
			4.44%
Working for rest of question
Computation of Weight and WACC						i	ii	iii=i*ii
			Market value			weight	Cost of capital	weight * cost
	Source
	equity		25200000	=420000*60		69.62%	10.15%	7.07%
	debt		9540000	=9000*1060		26.36%	4.07%	1.07%
	preferred stock		1458000	=18000*81		4.03%	4.44%	0.18%
			36198000					8.32%
	WACC =			8.32%