You are given the following information for Lightning Power Co. Assume the compa

Question

You are given the following information for Lightning Power Co. Assume the company’s tax rate is 30 percent. Debt: 6,000 6.1 percent coupon bonds outstanding, $1,000 par value, 15 years to maturity, selling for 104 percent of par; the bonds make semiannual payments. Common stock: 330,000 shares outstanding, selling for $51 per share; the beta is 1.07. Preferred stock: 11,000 shares of 4 percent preferred stock outstanding, currently selling for $71 per share. Market: 6 percent market risk premium and 4.10 percent risk-free rate. What is the company's WACC?

Explanation / Answer

Answer :   

Calculation of Weight of stock & debt in Capital Sl. no. Particulars Qty Current Market Rate Current Market value Weight 1 Common Stock 330000 51 16830000 70.56 2 Preferred Stock 11000 71 781000 3.27 3 Bond 6000 1040 6240000 26.16 ---------------------------- ----------------- Total Market Value of stock & debt 23851000 100.00 ---------------------------- '---------------- Calculation of cost Cost of Equity = Risk Free rate+beta *Market risk premium '=4.1+1.07*6 '=10.52% Cost of Preferred stock = 4% Cost of Debt = Present interest payable = '1000*6.1% = 61 Actual bond sale 1040 actual interest rate = '61/1040*100 = 5.87% Debt cost '= rd(1-tax rate) '=5.87*(1-0.3) '=4.11% Calculation of WACC Weight Cost Weight * Cost Sl. no. Particulars 70.56% 10.52% 7.42% 1 Common Stock 3.27% 4.00% 0.13% 2 Preferred Stock 26.16% 4.11% 1.08% 3 Bond ----------------- ----------------- Total 100.00 8.63% '---------------- '---------------- WACC = 8.63%

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