Consider the following information for Evenflow Power Co., Debt: 2,500 8.5 perce

Question

Consider the following information for Evenflow Power Co.,

Debt: 2,500 8.5 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: 55,000 shares outstanding, selling for $63 per share; the beta is 1.14.

Preferred stock: 7,500 shares of 8 percent preferred stock outstanding, currently selling for $105 per share.

Market: 10 percent market risk premium and 8 percent risk-free rate.

Assume the company's tax rate is 33 percent.

Required: Find the WACC. (Do not round your intermediate calculations.)

13.2% 12.94% 12.7% 13.82% 12.8%

Explanation / Answer

Solution.

Calculation for WACC

Cost of Equity = 0.08 + 1.14 ( 0.10) = 0.1940

Cost of preferred stock = $8 / $105 =0.0761

Cost of debt = 8.5% ( 1 - .33 ) = 0.0569

WACC = 0.1337 or 13.37%

Difference is due to fraction error answer may be 13.20%

Capital No of Unit Value Amount Weight Cost WACC Equity          55,000          63.00    3,465,000.00               0.51      0.1940    0.0985 Debt             2,500    1,030.00    2,575,000.00               0.38      0.0761    0.0287 Preferred Stock             7,500        105.00        787,500.00               0.12      0.0569    0.0066 Total    6,827,500.00               1.00    0.1337

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