8,800 8.1 percent coupon bonds outstanding, $1,000 par value, 22 years to maturi

Question

8,800 8.1 percent coupon bonds outstanding, $1,000 par value, 22 years to maturity, selling for 103.5 percent of par; the bonds make semiannual payments.

12,300 shares of 5.9 percent preferred stock outstanding, currently selling for $97.70 per share.

What is the company's cost of each form of financing? (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)

Calculate the company's WACC. (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Someone please help. I cant get this to save my life. Information on Janicek Power Co., is shown below. Assume the company’s tax rate is 38 percent. Debt:

8,800 8.1 percent coupon bonds outstanding, $1,000 par value, 22 years to maturity, selling for 103.5 percent of par; the bonds make semiannual payments.

        Common stock: 213,000 shares outstanding, selling for $83.30 per share; beta is 1.18.         Preferred stock:

12,300 shares of 5.9 percent preferred stock outstanding, currently selling for $97.70 per share.

        Market: 7.15 percent market risk premium and 4.95 percent risk-free rate. Required:

What is the company's cost of each form of financing? (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)

Cost   Cost of equity %   Aftertax cost of debt %   Cost of preferred stock %

Calculate the company's WACC. (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

  WACC %

Explanation / Answer

Step 1:

1) Cost of equity = risk-free rate + market risk premium*Beta

Cost of equity =4.95 + 7.15*1.18

Cost of equity = 13.39%

2) Cost of Preferred Stock = 5.9/97.70

Cost of Preferred Stock = 6.04%

3) Before Tax Cost of Debt = rate(nper,pmt,pv,fv) *2

Nper (indicates the semi annual period) = 22*2 = 44

PV (indicates the price) = 1000*103.5% = 1035

PMT (indicate the semi annual payment) = 1000*8.1%*1/2 = $ 40.50

FV (indicates the face value) = 1000

Rate (indicates YTM) = ?

Before Tax Cost of Debt = rate(44,40.50,-1035,1000) * 2

Before Tax Cost of Debt = 7.766 %

After Tax Cost of Debt = 7.766*(1-38%)

After Tax Cost of Debt = 4.81%

Step 2:

Market Value of Common Stock = 213000*83.30 = $ 17,742,900

Market value of Preferred Stock = 12300*97.70 = $ 1,201,710

Market Value of Bond = 8800*1035 = $ 9,108,000

Total Market Value = 17,742,900 +  1,201,710 +  9,108,000 = $ 28,052,610

Weight of Equity = 17,742,900/ 28,052,610 = 63.25%

Weight of Preferred Stock = 1,201,710/ 28,052,610 = 4.28%

Weight of Debt = 9,108,000/ 28,052,610 = 32.47%

Step3:

WACC = Weight of equity* Cost of equity + Weight of Preferred Stock* Cost of Preferred Stock + Weight of Debt* After Tax cost of Debt

WACC = 63.25%*13.39 + 4.28%*6.04 + 32.47%*4.81

WACC = 10.29%

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