Consider the following information for Evenflow Power Co., Debt: 5,500 6.5 perce

Question

Consider the following information for Evenflow Power Co.,

  Debt:

5,500 6.5 percent coupon bonds outstanding, $1,000 par value, 21 years to maturity, selling for 102 percent of par; the bonds make semiannual payments and have a YTM of 6.33%.

  Common stock:

121,000 shares outstanding, selling for $64 per share; the beta is 1.09.

  Preferred stock:

17,000 shares of preferred stock outstanding that pay an annual dividend of 5 percent of par, selling for $104 per share.

  Market:

7 percent market risk premium and 4 percent risk-free rate.

Assume the company's tax rate is 32 percent.

Required: Find the WACC. (Do not round your intermediate calculations.)

HINT: Use the Security Market Line to get the cost of the common equity. Use the perpetuity equation to get the cost of preferred equity, and keep in mind that par value of preferred stock is $100 (this is used to get the dividend). Don't forget to adjust the cost of debt for taxes (and don't bother to convert the YTM into an EAR, but leave it as an APR). You will also need to calculate the market value of all three types of securities to get the capital structure weights. Now you are ready to get the WACC

Consider the following information for Evenflow Power Co.,

Explanation / Answer

Debt

rd= 6.33%

Market value of Debt = 5500*102%*1000=$5610000

Common Stock

re=4%+1.09*7%= 11.63%         

Market value of stocks= 121,000*64=7744000

Preferred Stocks

rp= 5%*100/104= 4.81%

Market value of Preferred stocks =17000*104=$1768000

Total value =$5610000+7744000+1768000=15122000

WACC = rd*D/V*(1-tax) + re*E/V + rp*P/V

WACC = (6.33%*(1-32%)*5610000 + 11.63%*7744000+ 4.81%*1768000)/ 15122000

WACC = 8.11%

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