Consider the following information for Evenflow Power Co., Assume the company\'s
ID: 2708038 • Letter: C
Question
Consider the following information for Evenflow Power Co.,
Assume the company's tax rate is 34 percent.
Find the WACC. (Do not round your intermediate calculations.)
Debt:
4,500 6.5 percent coupon bonds outstanding, $1,000 par value, 21 years to maturity, selling for 104 percent of par; the bonds make semiannual payments.
Common stock:
103,500 shares outstanding, selling for $65 per share; the beta is 1.05.
Preferred stock:
12,500 shares of 5.5 percent preferred stock outstanding, currently selling for $105 per share.
Market:
7.5 percent market risk premium and 4.5 percent risk-free rate.
Explanation / Answer
Bond yield can be calculated in Excel as =RATE(21*2,-1000*6.5%/2,104%*1000,-1000)*2. This is equal to 6.16%
Cost of debt = 6.16%*(1-34%) = 4.06%
Mkt value of debt = 4500*1000*104% = 4,680,000
Mkt value of common stock = 103,500*65 = 6,727,500
Mkt value of preferred stock = 12,500*105 = 1,312,500
Total mkt value of firm = 4,680,000 + 6,727,500 + 1,312,500 = 12,720,000
Cost of common stock = 4.5% + 1.05*7.5% = 12.375%
Cost of preferred stock = 5.5/105 = 5.24%
WACC = 4,680,000/12,720,000*4.06% + 6,727,500/12,720,000*12.375% + 1,312,500/12,720,000*5.24% = 8.58%
Hope this helped ! Let me know in case of any queries.
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