Question

Consider the following information for Evenflow Power Co., Debt: 4,500 8.5 percent coupon bonds outstanding, $1,000 par value, 19 years to maturity, selling for 104 percent of par; the bonds make semiannual payments. Common stock: 99,000 shares outstanding, selling for $64 per share; the beta is 1.13. Preferred stock: 13,500 shares of 8 percent preferred stock outstanding, currently selling for $106 per share. Market: 9.5 percent market risk premium and 7.5 percent risk-free rate. Assume the company's tax rate is 34 percent. Required: Find the WACC. (Do not round your intermediate calculations.) A.) 12.16% B.)12.06% C.) 12.33% D.)13.19% E.)12.56%

Answer 1

Correct option is A.) 12.16%

Particulars	Working	Amount	Weight
Debt market value	=4500*104%*1000 =	4,680,000	37.599422%
Equity market value	=99000*64 =	6,336,000	50.903832%
Preference share market value	=13500*106 =	1,431,000	11.496746%
	Total	12,447,000	100%

Calculation of cost of the debt using financial calculator:

N = 38; PV = -1040 ; PMT = 42.5 ; FV = 1000 ; CPT > I/Y = 4.04221728%

Annual cost of debt = I/Y x 2 = 4.04221728% x 2 = Cost of debt = 8.084435%

Calculation of cost of equity:

Using CAPM: Ri = Rf + Beta x Market risk premium

Cost of equity =7.5%+1.13*9.5% = 18.235%

Calculation of cost of preference share

Cost of preference share = Dividend rate x Par value / Market price =(8%*100)/106

Cost of preference share = 7.547170%

WACC calculation:

WACC = Weight of equity x Cost of equity + Weight of preference share x cost of preference share + Weight of debt x Cost of debt x (1-Tax)

WACC = = 50.903832% x 18.235% + 11.496746% x 7.547170% + 37.599422% x 8.084435% x (1-34%)

WACC = 0.121561953

WACC = 12.16%