Consider the following information for Evenflow Power Co., 11.61% 10.77% 10.87%
ID: 2718941 • Letter: C
Question
Consider the following information for Evenflow Power Co.,
11.61%
10.77%
10.87%
11.27%
11.02%
Debt: 4,500 7 percent coupon bonds outstanding, $1,000 par value, 23 years to maturity, selling for 104 percent of par; the bonds make semiannual payments and have a YTM of 6.66%. Common stock: 112,500 shares outstanding, selling for $62 per share; the beta is 1.18. Preferred stock: 13,000 shares of preferred stock outstanding, paying 6.5 percent on $100 of par, and currently selling for $107 per share. Market: 8.5 percent market risk premium and 6 percent risk-free rate.Explanation / Answer
Calculation of WACC:
Cost of Debt = YTM * (1- Tax rate) = 6.66% * (1-31%)
4.60%
Cost of Common Stock = Risk free rate + Beta * Market Risk Premium = 6% + 1.18 * 8.5% =
16.03%
Cost of Preferred Stock = Dividend / Price = (100*6.5%) / 107
6.07%
Cost
Market Value
Weights
A
B
C = B/13046000
A*C
Debt
4.60%
$ 4,680,000
0.3587
1.65%
(4500 Bonds*$1000)*104%
Common Stock
16.03%
$ 6,975,000
0.5346
8.57%
(112500 Shares*$62)
Preferred Stock
6.07%
$ 1,391,000
0.1066
0.65%
(13000 Shares*$107)
Total
$ 13,046,000
WACC =
10.87%
Calculation of WACC:
Cost of Debt = YTM * (1- Tax rate) = 6.66% * (1-31%)
4.60%
Cost of Common Stock = Risk free rate + Beta * Market Risk Premium = 6% + 1.18 * 8.5% =
16.03%
Cost of Preferred Stock = Dividend / Price = (100*6.5%) / 107
6.07%
Cost
Market Value
Weights
A
B
C = B/13046000
A*C
Debt
4.60%
$ 4,680,000
0.3587
1.65%
(4500 Bonds*$1000)*104%
Common Stock
16.03%
$ 6,975,000
0.5346
8.57%
(112500 Shares*$62)
Preferred Stock
6.07%
$ 1,391,000
0.1066
0.65%
(13000 Shares*$107)
Total
$ 13,046,000
WACC =
10.87%
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