Given the following information for Evenflow Power Co., the WACC is______ percen

Question

Given the following information for Evenflow Power Co., the WACC is______ percent. Assume the company's tax rate is 34 percent

Debt: 4,000 8.5 percent coupon bonds outstanding, $1,000 par value, 19 years to maturity, selling for 105 percent of par; the bonds make semiannual payments.

Common stock: 92,000 shares outstanding, selling for $63 per share; the beta is 1.1.

Preferred stock: 11,500 shares of 7.5 percent preferred stock outstanding, currently selling for $106 per share.

Market: 9.5 percent market risk premium and 7 percent risk-free rate.

Please show how you got your answer.

Explanation / Answer

Hi,

Please find the answer as follows:

Cost of Debt

Coupon Payment = (1000*.085)/2 = 42.5

N = 19*2 = 38

PV = 1050

FV = 1000

R = ?

R = Rate(38, 42.5, - 1050, 1000) = 3.99*(1-.34) = 2.63%*2 = 5.266 or 5.27%

Cost of Preferred Stock = 7.5/106 = 7.08%

Common Stock =

Re = 7 + 1.1*(9.5) = 17.45%

WACC = 11.76%

Thanks.

Market Value Weights (A) Cost (B) (A*B) Debt 4200000 0.374 5.27 1.97 Preferred Stock 1219000 0.109 7.08 0.77 Equity 5796000 0.517 17.45 9.02
11215000 1.000
11.76

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