Question

Consider the following information for Evenflow Power Co.,

  

Debt:		4,000 5.5 percent coupon bonds outstanding, $1,000 par value, 18 years to maturity, selling for 103 percent of par; the bonds make semiannual payments.
Common stock:		92,000 shares outstanding, selling for $63 per share; the beta is 1.19.
Preferred stock:		11,500 shares of 4.5 percent preferred stock outstanding, currently selling for $105 per share.
Market:		6.5 percent market risk premium and 4.5 percent risk-free rate.

  

Assume the company's tax rate is 34 percent.

  

Required:

  

Find the WACC. (Do not round your intermediate calculations.)

Answer 1

	a	b	c = a * b
Particular	Numbers	Price	Total
Debt	4,000	1000*103% = 1030	41,20,000
Common Stock	92,000	63	57,96,000
Preferred Stock	11,500	105	12,07,500
		Total	1,11,23,500

Cost of Debt = 5.5%

Cost of Equity = 4.5% + 1.19 * 6.5% = 12.235%

Cost of Preferred Stock = 4.5%

WACC = 5.5% * (1 - 0.34) * (41,20,000/1,11,23,500) + 12.235% * (57,96,000/1,11,23,500) + 4.5% * (12,07,500/1,11,23,500)

= 1.3445 + 6.3752 + 0.4885

WACC = 8.2082% or 8.21%