Consider the following Information for Evenflow Power Co. 6,000 6.5 percent coup

Question

Consider the following Information for Evenflow Power Co. 6,000 6.5 percent coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 102 percent of par, the bonds make semlannual payments 126,000 shares outstanding, selling for $62 per share; the beta Is 1.11. 19,500 shares of 5 percent preferred stock outstanding, currently selling for $103 per share. 7 percent market risk premlum and 4.5 percent risk-free rate. Debt Common stock: Preferred stock Market Assume the company's tax rate Is 32 percent. Required Find the WACC. (Do not round your intermediate calculations.)

Explanation / Answer

WACC is 5.58%

Working:

a. After tax cost of debt calculation Before Tax Cost of debt = Average Income/Average Cost Where, (Semi annual) = (C+(F-P)/n)/((F+P)/2) C Coupon $      1,000 x 6.5%*6/12 = $    32.50 = (32.50+(1000-1020)/40)/((1000+1020)/2) F Par Value $    1,000 = 3.17% P Current Price $      1,000 x 102% = $    1,020 n Semi annual period 20*12/6 = 40 Before Tax Cost of debt = 3.17% x 2 (Annual) = 6.34% Adter tax cost of debt = 6.34% x (1-0.32) = 4.31% b. Preferred Stock dividend = Par Value of Preferred Stock x Preferred Dividend rate = $    100.0 x 5% = $         5.0 Costs of Preferred stock = Dividend on preferred stock/Selling price of preferred stock = $         5.0 / $        103 = 4.85% c. Cost of Equity = Risk free rate + Beta * Market risk premium = 4.5%+1.11*7% = 12.27% d. Weight of all components: Number of Quantity Per Unit Selling price Total Selling Value Debt         6,000 $             1,020 $       61,20,000 Common Stock 1,26,000 $                   62 $       78,12,000 Preferred Stock       19,500 $                 103 $       20,08,500 $    1,59,40,500 Weight of: Debt $ 61,20,000 / $ 1,59,40,500 =            0.384 Common Stock $ 78,12,000 / $ 1,59,40,500 =            0.490 Preferred Stock $ 20,08,500 / $ 1,59,40,500 =            0.126 Total            1.000 e. Weight costs Weighted cost Debt              0.384 4.31% 1.65% Common Stock              0.490 4.85% 2.38% Preferred Stock              0.126 12.27% 1.55% WACC 5.58%

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.