Given the following information for Electric Transport, find the WACC. Assume th
ID: 2720186 • Letter: G
Question
Given the following information for Electric Transport, find the WACC. Assume the company's tax rate is 34 percent.
Debt: 7,500, 8.4 percent coupon bonds outstanding. $1,000 par value, 22 years to maturity, selling for 103 percent of par, the bonds make semiannual payments.
Common stock: 195,000 shares outstanding, selling for $78 per share, beta is 1.21.
Preferred stock: 11,000 shares of 6.35 percent preferred stock outstanding, currently selling for $76 per share.
Market: 8 percent market risk premium and 5.1 percent risk-free rate.
Explanation / Answer
YTM on bonds :
Semiannual interest = 1000 *.084 *6/12 = 42
semiannual months = 22 *2 =44
current price = 1000 *103% = 1030
YTM =[Interest + (Face value -Price)/ months] /[(face value+ price)/2]
= [42 + (1000 - 1030 )/ 44 ] /[(1000 +1030)/2]
= [42 + (-30 /44 ) ] /[2030/2]
= [42 - .68] / 1015
= 41.32/1015
= .0407 semiannually or (.0407 *2 *100 ) = 8.14% annually
After tax cost of debt = 8.14 (1 -.34 ) = 5.3724%
2)Cost of equity = Rf + [Beta *market premium ]
= 5.1 + [1.21 * 8]
= 5.1 + 9.68
= 14.78%
cost of preferred stock = Dividend /current price
= 6.35 / 76
= .0836 or 8.36%
WACC = 11.50%
Market value weights based on market value Cost weights *cost After tax cost of debt 7500*1030 =7725000 .3250 [7725000/23771000] 5.3724 1.746 Cost of equity 195000*78 = 15210000 .6398 14.78 9.456 cost of preferred stock 11000*76 = 836000 .0352 8.36 .294 23771000 11.50%Related Questions
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