You are given the following information for lightnin Power Co. Assume the compan

Question

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

Debt: 6000 7.3 percent coupon bonds oustanding, $1000 par value, 15 years to maturity, selling for 109 percent of par; the bonds make semiannual payments.

Common stock: 450,000 shares outstanding, selling for $63 per share; the beta is 1.06.

Preferred Stock: 23,000 shares of 4 percent preferred stock outstanding, currently selling for $83 per share.

Market: 12 percent market risk premium and 5.3 percent risk-free rate.

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

Thanks!

Explanation / Answer

DEBENTURES:
The Cost of Debentures = 6.35*(1-0.35) = 4.13%
Market Value of Debentures issued = 1090*6000 = $6540000

COMMON STOCK
Cost of Stock = Risk Free Rate + Beta*Risk Premium
= 5.3 + 1.06*12 = 18.02%
Market Value of Common Stock = 63*450000 = $28350000

PREFERRED STOCK
Cost of Stock = 4%
Market Value of Preferred Stock = 83*23000 = $1909000

WACC = (6540000*4.13% + 1909000*4% + 28350000*18.02%)/(6540000 + 1909000 + 28350000)
= 14.82%

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