Given the following information for Bellevue Power Co, find the WACC. Assume the

Question

Given the following information for Bellevue Power Co, find the WACC. Assume the company's tax rate is 35 percent. Debt: 5,000. 7% coupon bonds outstanding, $ 1000 par value, 20 years to maturity, selling for 92 percent of par; bonds make semiannual payments. Common stock: 100,000 shares outstanding, selling for $57 per share; the beta is 1.15. Preferred stock: 13,000 shares of 7 percent preferred stock outstanding currently selling for $104 per share. Market: 8 percent market risk premium and 6 percent risk free rate.

Explanation / Answer

sol: WACC The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. WACC The WACC is the minimum return that a company must earn on an existing asset base to satisfy its creditors, owners, and other providers of capital, or they will invest elsewhere. WACC Companies raise money from a number of sources: common equity, preferred equity, straight debt, convertible debt, exchangeable debt, warrants, options, pension liabilities, executive stock options, governmental subsidies, and so on. Different securities, which represent different sources of finance, are expected to generate different returns. WACC The WACC is calculated taking into account the relative weights of each component of the capital structure. The more complex the company's capital structure, the more laborious it is to calculate the WACC.

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