You are given the following information for Lightning Power Co. Assume the compa

Question

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

Debt: 6,000 6.7 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 103 percent of par; the bonds make semiannual payments

Common stock: 390,000 shares outstanding, selling for $57 per share; the beta is 1.13

Preferred stock: 17,000 shares of 4 percent preferred stock outstanding, currently selling for $77 per share.

Market: 6 percent market risk premium and 4.70 percent risk-free rate.

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

Explanation / Answer

debt value = 6000 * 1.03* 1000 = 6180000

equity value = 390000 * 57 = 22230000

preferredvalue = 17000* 77 = 1309000

total value = 29719000

cost of equity = 4.7% + 1.13 * 6% = 11.48%

cost of debt :

1030 = 33.5PVIFA(r%,50) + 1000 PVIF (r%,50)

r = 6.457%

yTM=12.914%

after tax cost of debt = (1-0.35) * 12.914 = 8.39%

cost of prefferedstock = 4/77 = 5.19%

WACC = (22230000/29719000) * 11.48% + (6180000/29719000) * 8.39% + (1309000/29719000) * 5.19%

= 10.56%

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