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 the company WACC:

Firstly we calculate the Market value:

Market value of the debt=6000*1000*104%=$6240000

Market value of the equity=330000 share*$51=$16830000

Market value of preference share=11000 share*$71=$781000

Total market value=$6240000+$16830000+$781000

=$23851000

Ke=Rf+beta*Market risk premium

=4.10%+1.07*6%=10.52%

Kp=4/71=5.63%

Kd=

Interest rate=6.1% =(6.1/2)=3.05%

N=15 years=15*2=30 years

Par=1000

MV=1040

YTM=2.85%

YTM=2.85%*2=5.7%

Kd=5.7%(1-0.30)=3.99%

Particulars Market value Weight Cost of capital WACC Equity 16830000 0.705630791 10.52% 7.42% Debt 6240000 0.261624251 3.99% 1.04% Preference share 781000 0.032744958 5.63% 0.18% Total 23851000 8.65%

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