9,700 9.2 percent coupon bonds outstanding, $1,000 par value, 23 years to maturi
ID: 2718485 • Letter: 9
Question
9,700 9.2 percent coupon bonds outstanding, $1,000 par value, 23 years to maturity, selling for 98 percent of par; the bonds make semiannual payments.
13,200 shares of 5.85 percent preferred stock outstanding, currently selling for $96.80 per share.
Calculate the company's WACC. (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
WACC ????
Information on Janicek Power Co., is shown below. Assume the company’s tax rate is 30 percent.Explanation / Answer
Solution: Formula used for calculation of WACC (Weighted Average Cost of Capital) is: KWACC = (WE x KE) + (WD x KDafter tax) + (WP x KP) In which: KWACC = Weighted average cost of capital WE = Market value weight of Common Stock KE = Cost of Equity (Common stock) WD = Market value weight of Debt KDafter tax = After-tax cost of debt WP = Market value weight of Preferred Stock KP = Cost of Preferred Stock Calculation is shown below: Market value of debt = 9,700 x ($1,000 x 98%) 9,700 x $980 = $9,506,000 Market value of common stock = 222,000 x $84.20 = 222,000 x $84.20 $18,692,400 Market value of preferred stock = 13,200 x $96.80 = 13,200 x $96.80 $1,277,760 Total market value of firm = Market value of debt +Market value of common stock + Market value of preferred stock = $9,506,000 + $18,692,400 + $1,277,760 = $29,476,160 Market value weight of Debt (WD) = Market value of debt / Total market value of firm = $9,506,000 / $29,476,160 = 0.3225 Market value weight of Common Stock (WE) = Market value of common stock / Total market value of firm = $18,692,400 / $29,476,160 = 0.6342 Market value weight of Preferred Stock (WP) = Market value of preferred stock / Total market value of firm = $1,277,760 / $29,476,160 = 0.0433 Before tax Cost of Debt (KD before tax) = ($36 x A.P.V.F50 R%) + ($1,000 / (1 + R%)50) Using interpolation (or trial rate method), R = 2.91% Annual after before tax cost of debt = 2.91% x 2 = 5.82% After tax cost of debt (KDafter tax) = 5.82% x (1 – 0.30) 5.82%*0.7 = 0.04074 4.07% Using CAPM, Cost of Equity (KE) = Risk free rate + (Beta x Market Risk Premium) = 4.9%+(1.27*7.1%) = 4.9% + 9.02% = 13.92% or 0.1392 Cost of Preferred Stock (KP) = Annual dividend / Current market price = $5.85/ $96.80 = 6.04% = 0.06043 or 6.04% Finally, WACC is calculated as below: KWACC = (WE x KE) + (WD x KDafter tax) + (WP x KP) KWACC = (0.6342 x 0.1392) + (0.3225 x 0.0407) + (0.0433 x 0.0604) = (0.6342 x 0.1392) + (0.3225 x 0.0407) + (0.0433 x 0.0604) =0.0882 + 0.0131 + 0.0026 =0.10402 or 10.40% Hence, WACC is 10.40%
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