In: Finance
Information on Gerken Power Co., is shown below. Assume the
company’s tax rate is 38 percent.
Debt: |
8,800 8.1 percent coupon bonds outstanding, $1,000 par value, 22 years to maturity, selling for 103.5 percent of par; the bonds make semiannual payments. |
|
Common stock: | 213,000 shares outstanding, selling for $83.30 per share; beta is 1.18. | |
Preferred stock: |
12,300 shares of 5.9 percent preferred stock outstanding, currently selling for $97.70 per share. |
|
Market: | 7.15 percent market risk premium and 4.95 percent risk-free rate. |
Required:
Calculate 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.)
MV of equity=Price of equity*number of shares outstanding |
MV of equity=83.3*213000 |
=17742900 |
MV of Bond=Par value*bonds outstanding*%age of par |
MV of Bond=1000*8800*1.035 |
=9108000 |
MV of Preferred equity=Price*number of shares outstanding |
MV of Preferred equity=97.7*12300 |
=1201710 |
MV of firm = MV of Equity + MV of Bond+ MV of Preferred equity |
=17742900+9108000+1201710 |
=28052610 |
Cost of equity |
As per CAPM |
Cost of equity = risk-free rate + beta * (Market risk premium) |
Cost of equity% = 4.95 + 1.18 * (7.15) |
Cost of equity% = 13.39 |
Cost of debt |
K = Nx2 |
Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k] + Par value/(1 + YTM/2)^Nx2 |
k=1 |
K =22x2 |
1035 =∑ [(8.1*1000/200)/(1 + YTM/200)^k] + 1000/(1 + YTM/200)^22x2 |
k=1 |
YTM = 7.7656442479 |
After tax cost of debt = cost of debt*(1-tax rate) |
After tax cost of debt = 7.7656442479*(1-0.38) |
= 4.814699433698 |
cost of preferred equity |
cost of preferred equity = Preferred dividend/price*100 |
cost of preferred equity = 5.9/97.7*100 |
=6.04 |
Weight of equity = MV of Equity/MV of firm |
Weight of equity = 17742900/28052610 |
W(E)=0.6325 |
Weight of debt = MV of Bond/MV of firm |
Weight of debt = 9108000/28052610 |
W(D)=0.3247 |
Weight of preferred equity = MV of preferred equity/MV of firm |
Weight of preferred equity = 1201710/28052610 |
W(PE)=0.0428 |
WACC=after tax cost of debt*W(D)+cost of equity*W(E)+Cost of preferred equity*W(PE) |
WACC=4.81*0.3247+13.39*0.6325+6.04*0.0428 |
WACC% = 10.29 |