Consider the following information for Evenflow Power Co., Debt: 5,000 8.5 perce

Question

Consider the following information for Evenflow Power Co., Debt: 5,000 8.5 percent coupon bonds outstanding, $1,000 par value, 21 years to maturity, selling for 103 percent of par; the bonds make semiannual payments. Common stock: 120,000 shares outstanding, selling for $55 per share; the beta is 1.16. Preferred stock: 18,000 shares of 7.5 percent preferred stock outstanding (note: multiply this percentage in decimal format times 100 to get the dividend), currently selling for $104 per share. Market: 9 percent market risk premium and 7 percent risk-free rate. Assume the company's tax rate is 33 percent. Required: Find the WACC. (Do not round your intermediate calculations.)

11.92%

11.52%

12.54%

11.42%

11.65%

Explanation / Answer

Market value of debt = 5,000 * $1,000 * 1.03 = $5,150,000

Market value of common stock = 120,000 * $55 = $6,600,000

Market value of preferred stock = 18,000 * $104 = $1,872,000

Total value = $5,150,000+$6,600,000+$1,872,000 = $13,622,000

Weights:

Debt = $5,150,000/$13,622,000 = 0.378

Common stock = 0.484

Preferred stock = 0.138

Cost of common stock: Using CAPM

Ke = risk free rate + Beta *market risk premium = 0.07 + 1.16*0.09 = 0.1744 or 17.44%

Cost of preferred stock = $7.5/104 = 7.2%

Cost of debt = Using financial calculator, enter N =42, PV = 1030, PMT = 42.50, FV = 1000, and press I/YR =4.10%

Annual before cost of debt = 4.10 * 2 = 8.2%

After tax cost of debt = 8.2%(1-0.33) = 5.94%

WACC = 17.44%( 0.484) + 7.2%(0.138) + 5.94%(0.378) = 0.0844 + 0.0099 + 0.0224 = 0.1165 or 11.65%

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

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