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 38 percent.

10,000 6.5 percent coupon bonds outstanding, $1,000 par value, 30 years to maturity, selling for 108 percent of par; the bonds make semiannual payments.

15,000 shares of 5 percent preferred stock outstanding, currently selling for $75 per share.

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

You are given the following information for Lightning Power Co. Assume the company’s tax rate is 38 percent.

Explanation / Answer

Answer: We will begin by finding the market value of each type of financing. We find

Market value of Debt=10000*1000*108%=10800000

Market value of equity=370000 shares*$55 per share=20350000

Market value of preference shares=15000 shares *$75=1125000

Total value=32275000

Now, we can find the cost of equity using the CAPM. The cost of equity is:

Ke=4.50%+1.11*6%

=11.16%

Kp=5/75=6.67%

The cost of debt is the YTM of the bonds, so:

P0 = 1,080 =

Coupon= 1,000*6.5%*0.5=32.5   

T=60

R = 2.96%

YTM = 2.96% × 2 = 5.92%

• And the aftertax cost of debt is:

• RD = (1 – .38)(.0592) = 3.6704%

WACC=

Particulars Cost Market value Weight WACC Debt 3.6704 10800000 0.334624322 1.228205112 Equity 11.16 20350000 0.630518978 7.036591789 Preference shares 6.67 1125000 0.0348567 0.232494191 Total 32275000 1 8.497291092

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