Question

Information on lightening power Co. is show below. Assume the company's tax rate is 24 percent.

DEBT: 16,900 5.9 percent coupon bonds outstanding, $1000 par value, 26 years to maturity, selling for 106.5 percent of par; semi annual payments

COMMON STOCK: 555,000 shares outstanding, selling for $82.00 per share; Beta is 1.20

PREFERRED STOCK: 22,000 shares of 4.2 percent preferred stock outstanding, currently selling for $91.40 per share. the par value is $100.

MARKET: 6.5 percent market risk premium and 3.1 percent risk-free rate.

A.) What is the company's cost of each form of financing?

B.) Calculate the company's WACC.

Show all work, Please and thank you :)

Answer 1

MV of equity=Price of equity*number of shares outstanding

MV of equity=82*555000

=45510000

MV of Bond=Par value*bonds outstanding*%age of par

MV of Bond=1000*16900*1.065

=17998500

MV of Preferred equity=Price*number of shares outstanding

MV of Preferred equity=91.4*22000

=2010800

MV of firm = MV of Equity + MV of Bond+ MV of Preferred equity

=45510000+17998500+2010800

=65519300

Weight of equity = MV of Equity/MV of firm

Weight of equity = 45510000/65519300

W(E)=0.6946

Weight of debt = MV of Bond/MV of firm

Weight of debt = 17998500/65519300

W(D)=0.2747

Weight of preferred equity = MV of preferred equity/MV of firm

Weight of preferred equity = 2010800/65519300

W(PE)=0.0307

A. Cost of equity

As per CAPM

Cost of equity = risk-free rate + beta * (Market risk premium)

Cost of equity% = 3.1 + 1.2 * (6.5)

Cost of equity% = 10.9%

A. Cost of debt

K = Nx2

Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2

k=1

K =26x2

1065 =∑ [(5.9*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^26x2

k=1

YTM = 5.43%

After tax cost of debt = cost of debt*(1-tax rate)

After tax cost of debt = 5.4304222006*(1-0.24)

= 4.127120872456

A. cost of preferred equity

cost of preferred equity = Preferred dividend/price*100

cost of preferred equity = 4.2/(91.4)*100

=4.6%

B. WACC=after tax cost of debt*W(D)+cost of equity*W(E)+Cost of preferred equity*W(PE)

WACC=4.13*0.2747+10.9*0.6946+4.6*0.0307

WACC =8.85%