You are given the following information for Watson Power Co. Assume the company’

Question

You are given the following information for Watson Power Co. Assume the company’s tax rate is 30 percent.

9,000 6.4 percent coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 107 percent of par; the bonds make semiannual payments.

14,000 shares of 4 percent preferred stock outstanding, currently selling for $74 per share.

What is the company's WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

You are given the following information for Watson Power Co. Assume the company’s tax rate is 30 percent.

Explanation / Answer

YTM = [ Annual Interest +(Face Value-Market Price)/Years to maturity]/(Face value+2.Maketvalue)/3 interest payment/year = 64 Face value 1000 Market price = 1070 Years to maturity = 20 YTM = [64+(1000-1070)/20]/(1000+2*1070)/3            = 5.78% Post tax YTM =5.78*0.70 = 4.046 % Stock beta = 1.1 Risk free rate 4.40% Market risk premium= 11% Required return on stock = Rf +Rp*beta                     = 0.0440+0.110*1.1                     = 16.50% Cost of stock =16.5% Preference Share Price= $74/share Dividend /share =$4 Cost of preference share = 5.41% Details Market Value Cost Weight Of Value Debt      9,630,000 4.046% 31.99% Stock 19,440,000 16.50% 64.57% Preference Share      1,036,000 5.41% 3.44% Total 30,106,000 WACC = 4.046%*31.99%+16.5%*64.57%+5.41%*3.44%                 = 12.13% So WACC of the company =12.13%

Related Questions

Navigate

• Browse (All)
• Browse Y
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.