Consider the following information for Evenflow Power Co., 6,000 9 percent coupo

Question

Consider the following information for Evenflow Power Co.,

6,000 9 percent coupon bonds outstanding, $1,000 par value, 21 years to maturity, selling for 103 percent of par; the bonds make semiannual payments and have a YTM of 8.69%.

Common stock: 144,000 shares outstanding, selling for $63 per share; the beta is 1.15

18,000 shares of preferred stock outstanding, paying 8 percent on $100 of par, and currently selling for $106 per share.

Assume the company's tax rate is 32 percent.

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. Don't forget to adjust the cost of debt for taxes (and don't 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.

A)13.62

B)13.76

C)14.62

D)13.52

E) 14.02

Debt:

6,000 9 percent coupon bonds outstanding, $1,000 par value, 21 years to maturity, selling for 103 percent of par; the bonds make semiannual payments and have a YTM of 8.69%.

:

Common stock: 144,000 shares outstanding, selling for $63 per share; the beta is 1.15

Preferred stock:

18,000 shares of preferred stock outstanding, paying 8 percent on $100 of par, and currently selling for $106 per share.

Market: 11 percent market risk premium and 7.5 percent risk-free rate.

Assume the company's tax rate is 32 percent.

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. Don't forget to adjust the cost of debt for taxes (and don't 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.

A)13.62

B)13.76

C)14.62

D)13.52

E) 14.02

Explanation / Answer

Answer:

Debt = 6000*1030 = 6180000, Common Stock = 144000 *63 = 9072000, Preferred Stock = 18000*106= 1908000, CE = 6180000+ 9072000+ 1908000 = 17160000

So, WACC = Kd* D/CE + Kp* P/CE + Ke * E/CE

= (9(0.68) * 6180/17160] + (8 * 1908/17160) + (7.5 + 1.15(11) ) *9072/17160)

   = 2.20 + 0.89 + 10.65 = 13.76 % (Approx)

THanksf

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