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 your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Solutions

Expert Solution

Debt:

Number of bonds outstanding = 22,000
Face Value = $2,000

Current Price = 107% * $2,000
Current Price = $2,140

Market Value of Debt = 22,000 * $2,140
Market Value of Debt = $47,080,000

Annual Coupon Rate = 5.00%
Semiannual Coupon Rate = 5.00%
Semiannual Coupon = 2.50% * $2,000
Semiannual Coupon = $50

Time to Maturity = 25 years
Semiannual Period to Maturity = 50

Let Semiannual YTM be i%

$2,140 = $50 * PVIFA(i%, 50) + $2,000 * PVIF(i%, 50)

Using financial calculator:
N = 50
PV = -2140
PMT = 50
FV = 2000

I = 2.265%

Semiannual YTM = 2.265%
Annual YTM = 2 * 2.265%
Annual YTM = 4.53%

Before-tax Cost of Debt = 4.53%
After-tax Cost of Debt = 4.53% * (1 - 0.25)
After-tax Cost of Debt = 3.3975%

Common Stock:

Number of shares outstanding = 430,000
Current Price = $68

Market Value of Common Stock = 430,000 * $68
Market Value of Common Stock = $29,240,000

Cost of Common Stock = Risk-free Rate + Beta * Market Risk Premium
Cost of Common Stock = 3.30% + 0.93 * 7.00%
Cost of Common Stock = 9.81%

Market Value of Firm = Market Value of Debt + Market Value of Common Stock
Market Value of Firm = $47,080,000 + $29,240,000
Market Value of Firm = $76,320,000

Weight of Debt = $47,080,000 / $76,320,000
Weight of Debt = 0.6169

Weight of Common Stock = $29,240,000 / $76,320,000
Weight of Common Stock = 0.3831

WACC = Weight of Debt * After-tax Cost of Debt + Weight of Common Stock * Cost of Common Stock
WACC = 0.6169 * 3.3975% + 0.3831 * 9.81%
WACC = 5.85%

jeff jeffy answered 4 months ago

Next > < Previous

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 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...

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 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....

Subjects