Question

Information on Janicek Power Co., is shown below. Assume the company’s tax rate is 40 percent.

Debt:	9,400 8.4 percent coupon bonds outstanding, $1,000 par value, 21 years to maturity, selling for 100.5 percent of par; the bonds make semiannual payments.
Common stock:	219,000 shares outstanding, selling for $83.90 per share; beta is 1.24.
Preferred stock:	12,900 shares of 5.95 percent preferred stock outstanding, currently selling for $97.10 per share.
Market:	7.2 percent market risk premium and 5 percent risk-free rate.

Required:

What is the company's cost of each form of financing? (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)

	Cost
Cost of equity	%
Aftertax cost of debt	%
Cost of preferred stock	%

Calculate the company's WACC. (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

WACC

%

Answer 1

Cost of debt:

Using financial calculator BA II Plus - Input details:	#
FV = Future Value =	$1,000.00
PV = Present Value =	-$1,005.00
N = Total number of periods = Years x frequency of coupon =	42
PMT = Payment = Coupon / frequency of coupon =	$47.00
CPT > I/Y = Rate or YTM =	4.6726
Convert Yield in annual and percentage form = Yield / 100*2 =	9.35%
After-tax cost of debt = YTM x (1-Tax) = Yield x (1-40%) =	5.61%

.

Cost of equity as per CAPM:

Cost of equity = Risk free rate + Beta x Market risk premium

Cost of equity = 5% + 1.24 x 7.2%

Cost of equity = 13.93%

.

Cost of preferred share = Face value x Dividend in % / Selling price of preferred

Cost of preferred share = 100 x 5.95% / 97.1

Cost of preferred share = 6.13%

------------

Each cost of financing:

Particulars	Cost
Cost of equity	13.93%
After tax cost of debt	5.61%
Cost of preferred	6.13%

WACC = Cost of equity x Weight of equity + Cost of preferred x Weight of preferred x After tax cost of debt x Weight of debt

WACC = 13.93% x 63.20% + 6.13%*4.31% + 5.61%*32.49%

WACC = 10.89%

The following table does the detail working:

Particulars	Price	Quantity	Total value	Weights	Cost	Weight x Cost
Equity	83.9	219000	18,374,100.00	63.20%	13.93%	8.802%
Debt	1005	9400	9,447,000.00	32.49%	5.61%	1.822%
Preferred	97.1	12900	1,252,590.00	4.31%	6.13%	0.264%
			29,073,690.00			10.89%