You are given the following information for Huntington Power Co. Assume the comp

Question

You are given the following information for Huntington Power Co. Assume the company’s tax rate is 35 percent.

9,000 7.0 percent coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 106 percent of par; the bonds make semiannual payments.

What is the company's WACC? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))

You are given the following information for Huntington Power Co. Assume the company’s tax rate is 35 percent.

Explanation / Answer

Step 1:

1) Cost of Common Stock = Rf + (Rm-Rf)*Beta

Cost of Common Stock = 5 + 9*1.03

Cost of Common Stock = 14.27%

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

Before Tax Cost of Debt = rate(40,35,-1060,1000) * 2

Before Tax Cost of Debt = 6.46 %

After Tax Cost of Debt = 6.46*(1-35%)

After Tax Cost of Debt = 4.20%

Step 2:

Market Value of Common Stock = 420000*60 = $ 25,200,000

Market Value of Bond = 9000*1060 = $ 9,540,000

Total Market Value = $ 34,740,000

Weight of Common Stock = 2520/3474

Weight of Debt = 954/3474

Step3:

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

WACC = 2520/3474*14.27 + 954/3474*4.20

WACC = 11.50%

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