Question

In: Finance

You are given the following information for Huntington Power Co. Assume the company’s tax rate is...

You are given the following information for Huntington Power Co. Assume the company’s tax rate is 23 percent.

Debt: 24,000 5.2 percent coupon bonds outstanding, $2,000 par value, 23 years to maturity, selling for 107 percent of par; the bonds make semiannual payments.

Common stock: 440,000 shares outstanding, selling for $70 per share; the beta is .95.

Market: 6 percent market risk premium and 3.5 percent risk-free rate.

What is 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.)

Solutions

Expert Solution

MV of equity=Price of equity*number of shares outstanding
MV of equity=70*440000
=30800000
MV of Bond=Par value*bonds outstanding*%age of par
MV of Bond=2000*24000*1.07
=51360000
MV of firm = MV of Equity + MV of Bond
=30800000+51360000
=82160000
Weight of equity = MV of Equity/MV of firm
Weight of equity = 30800000/82160000
W(E)=0.3749
Weight of debt = MV of Bond/MV of firm
Weight of debt = 51360000/82160000
W(D)=0.6251
Cost of equity
As per CAPM
Cost of equity = risk-free rate + beta * (Market risk premium)
Cost of equity% = 3.5 + 0.95 * (6)
Cost of equity% = 9.2
Cost of debt
                  K = Nx2
Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2
                   k=1
                  K =23x2
2140 =∑ [(5.2*2000/200)/(1 + YTM/200)^k]     +   2000/(1 + YTM/200)^23x2
                   k=1
YTM = 4.6988909729
After tax cost of debt = cost of debt*(1-tax rate)
After tax cost of debt = 4.6988909729*(1-0.23)
= 3.618146049133
WACC=after tax cost of debt*W(D)+cost of equity*W(E)
WACC=3.62*0.6251+9.2*0.3749
WACC =5.71%

Related Solutions

You are given the following information for Huntington Power Co. Assume the company’s tax rate is...
You are given the following information for Huntington Power Co. Assume the company’s tax rate is 25 percent.      Debt: 26,000 5.4 percent coupon bonds outstanding, $2,000 par value, 25 years to maturity, selling for 105 percent of par; the bonds make semiannual payments.   Common stock: 450,000 shares outstanding, selling for $72 per share; the beta is 1.06.   Market: 8 percent market risk premium and 3.7 percent risk-free rate. What is the company's WACC? (Do not round intermediate calculations and...
You are given the following information for Huntington Power Co. Assume the company’s tax rate is...
You are given the following information for Huntington Power Co. Assume the company’s tax rate is 25 percent. Debt: 22,000 5 percent coupon bonds outstanding, $2,000 par value, 25 years to maturity, selling for 107 percent of par; the bonds make semiannual payments. Common stock: 430,000 shares outstanding, selling for $68 per share; the beta is .93. Market: 7 percent market risk premium and 3.3 percent risk-free rate. What is the company's WACC? (Do not round intermediate calculations and enter...
You are given the following information for Huntington Power Co. Assume the company’s tax rate is...
You are given the following information for Huntington Power Co. Assume the company’s tax rate is 23 percent.      Debt: 28,000 4.7 percent coupon bonds outstanding, $2,000 par value, 23 years to maturity, selling for 103 percent of par; the bonds make semiannual payments.   Common stock: 460,000 shares outstanding, selling for $74 per share; the beta is 1.08.   Market: 7 percent market risk premium and 3.9 percent risk-free rate. What is the company's WACC? (Do not round intermediate calculations and...
11 You are given the following information for Huntington Power Co. Assume the company’s tax rate...
11 You are given the following information for Huntington Power Co. Assume the company’s tax rate is 22 percent.      Debt: 31,000 5 percent coupon bonds outstanding, $2,000 par value, 21 years to maturity, selling for 105 percent of par; the bonds make semiannual payments.   Common stock: 475,000 shares outstanding, selling for $77 per share; the beta is 1.11.   Market: 7 percent market risk premium and 4.2 percent risk-free rate. What is the company's WACC? (Do not round intermediate calculations...
You are given the following information for Cleen Power Co. Assume the company’s tax rate is...
You are given the following information for Cleen Power Co. Assume the company’s tax rate is 40 percent. Debt: 8,000 7.5 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 104 percent of par; the bonds make semiannual payments. Common stock: 470,000 shares outstanding, selling for $65 per share; the beta is 1.08. Market: 8 percent market risk premium and 5.5 percent risk-free rate. What is the company's WACC? (Do not round intermediate calculations. Enter your...
You are given the following information for Watson Power Co. Assume the company’s tax rate is...
You are given the following information for Watson Power Co. Assume the company’s tax rate is 25 percent. Debt: 15,000 6.4 percent coupon bonds outstanding, $1,000 par value, 28 years to maturity, selling for 106 percent of par; the bonds make semiannual payments. Common stock: 480,000 shares outstanding, selling for $66 per share; the beta is 1.17. Preferred stock: 21,000 shares of 4.2 percent preferred stock outstanding, currently selling for $87 per share. The par value is $100 per share....
You are given the following information for Lightning Power Co. Assume the company’s tax rate is...
You are given the following information for Lightning Power Co. Assume the company’s tax rate is 24 percent.   Debt: 24,000 7.3 percent coupon bonds outstanding, $1,000 par value, 18 years to maturity, selling for 107 percent of par; the bonds make semiannual payments.   Common stock: 570,000 shares outstanding, selling for $75 per share; beta is 1.19.   Preferred stock: 25,500 shares of 5.1 percent preferred stock outstanding, currently selling for $96 per share. The par value is $100 per share.   Market:...
You are given the following information for Lightning Power Co. Assume the company’s tax rate is...
You are given the following information for Lightning Power Co. Assume the company’s tax rate is 24 percent.   Debt: 24,000 7.3 percent coupon bonds outstanding, $1,000 par value, 18 years to maturity, selling for 107 percent of par; the bonds make semiannual payments.   Common stock: 570,000 shares outstanding, selling for $75 per share; beta is 1.19.   Preferred stock: 25,500 shares of 5.1 percent preferred stock outstanding, currently selling for $96 per share. The par value is $100 per share.   Market:...
You are given the following information for Magrath Power Co. Assume the company’s tax rate is...
You are given the following information for Magrath Power Co. Assume the company’s tax rate is 35%. Debt: 12,000 5% coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 98% of par; the bonds make semiannual payments. Common stock: 525,000 shares outstanding, selling for $58 per share; the beta is 0.98 Preferred stock: 35,000 shares of 3.5% preferred stock outstanding, currently selling for $69 per share. Market:8% market risk premium and 3.5% risk-free rate. Use the approximate...
You are given the following information for Watson Power Co. Assume the company’s tax rate is...
You are given the following information for Watson Power Co. Assume the company’s tax rate is 23 percent.   Debt: 18,000 6.7 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 108 percent of par; the bonds make semiannual payments.   Common stock: 510,000 shares outstanding, selling for $69 per share; the beta is 1.20.   Preferred stock: 22,500 shares of 4.5 percent preferred stock outstanding, currently selling for $90 per share. The par value is $100 per share....
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT