You are given the following information for Watson Power Co. Assume the company’
ID: 2727143 • Letter: Y
Question
You are given the following information for Watson Power Co. Assume the company’s tax rate is 40 percent. Debt: 10,000 7.1 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 107 percent of par; the bonds make semiannual payments. Common stock: 430,000 shares outstanding, selling for $61 per share; the beta is 1.04. Preferred stock: 21,000 shares of 5 percent preferred stock outstanding, currently selling for $81 per share. Market: 10 percent market risk premium and 5.1 percent risk-free rate. What is the company's WACC?
Explanation / Answer
AFETER TAX COST OF DEBT
= COUPON * (1 - TAX RATE)
= 7.1% * (1 - 0.4)
= 4.26%
COST OF PREFERED STOCK
ASSUMING $100 PAR VALUE
= DIVIDEND / CURRENT PRICE OF PREFERED STOCK
= $5 / $81
= 6.17%
COST OF COMMON STOCK
= Rf + BETA * MARKET RISK PREMIUM
= 5.1% + 1.04 * 10%
= 15.5%
TOTAL MARKET VALUE WEIGHT COST COST * WEIGHT DEBT $10700000 0.28 4.26% 1.193% COMMON STOCK $26230000 0.68 15.5% 10.540% PREFERED STOCK $1701000 0.04 6.17% 0.245% TOTAL $38631000 1.00 WACC 11.978%Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.