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 40 percent. Debt: 8,000 6.3 percent coupon bonds outstanding dollar 1,000 par value, 20 years to maturity, selling for 106 percent of par, the bonds make semiannual payments. Common stock: 650, 000 shares outstanding, selling for dollar 53 per share; the beta is 1.09. Preferred stock: 13,000 shares 3 percent stock outstanding, currently selling for dollar 73 per share. Market: 10 percent market premium and 4.3 percent risk-free rate. What is the company's WACC? (Do not your intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) WACC percentage

Explanation / Answer

cost of debt = interest +(par value-market value)/years to maturity / (par value+market value)/2

63+(1000-1060)/20 / (1000+1060)/2 = 60/1030 = 5.82%

cost of equity = risk free rate +(market return- risk free rate)*beta

=4.3+(10)*1.09= 15.2

cost of preferred stock = 3/73 = 4.10%

no of units outstanding price per unit value weight cost of capital weight* cost of capital value of equity 350000 53 18550000 0.654783 0.152 0.099527003 value of debt 8000 1060 8480000 0.299329 0.0582 0.017420967 value of preferred stock 13000 100 1300000 0.045888 0.041 0.001881398 value of firm 28330000 weighted average cost of capital 0.118829368 11.88%

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