Consider the following information for Evenflow Power Co., Debt: 3,500 8 percent

Question

Consider the following information for Evenflow Power Co.,
Debt: 3,500 8 percent coupon bonds outstanding, $1,000 par value, 22 years to maturity,selling for 102 percent of par; the bonds make semiannual payments. Common stock: 84,000 shares outstanding, selling for $57 per share; the beta is 1.18. Preferred stock: 11,500 shares of 7 percent preferred stock outstanding (note: multiply this percentage in decimal format times 100 to get the dividend), currently selling for $105 per share. Market: 8.5 percent market risk premium and 6.5 percent risk-free rate. Assume the company's tax rate is 32 percent.
Required:
Find the WACC.(Do not round your intermediate calculations.) Consider the following information for Evenflow Power Co.,

Explanation / Answer

Calculation of cost of debt Price =102%*$1000 =1020 Let cost of debt be r Semiannual coupon payment = 8%*1000/2= 40 1020 = 40/(1+r/2) + 40/(1+r/2)^2 + 40/(1+r/2)^2 ...............10 40/(1+r/2)^44 r =7.80% Total Debt =1020*3,500 = $3,570,000 Calculation of cost of equity Re = 6.5% +1.18**8.5% =16.53% Total Equity = 84,000*$57=$4,788,000 Calculation of cost of preferred stock Dividend = 7%*100 =7 Cost of Preferred stock = 7/105 =6.67% Value of Preferred Stock =$105*11,500 =$ 1,207,500 WACC = (D/V)*Rd*(1-T) + (E/V)*Re + (P/V)*Rp WACC = (16.53%*$4,788,000 +6.67%*$1,207,500 + 7.80%*$3,570,000*(1-.32))/($4,788,000 + $1,207,500+ $3,570,000) = 11.10%

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