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: 7,000 6.2 percent coupon bonds outstanding, $1,000 par value, 15 years to maturity, selling for 105 percent of par; the bonds make semiannual payments. Common stock: 340,000 shares outstanding, selling for $52 per share; the beta is 1.08. Preferred stock: 12,000 shares of 5 percent preferred stock outstanding, currently selling for $72 per share. Market: 8 percent market risk premium and 4.2 percent risk-free rate. What is the company's WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) WACC %

Explanation / Answer

Market Value of debt = 1.05 * 1000 * 7000 = 7,350,000

Market Value of equity = 340,000 * 52 = 17,680,000

Market Value of preferred stock = 12000*72 = 864,000

Total value = 7,350,000 + 17,680,000 + 864,000 = 25,894,000

Weight of Equity = We = 17,680,000/ 25,894,000 =0.6828

Weight of debt = Wd =  7,350,000/25,894,000 = 0.2838

Weight of preferred stock = Wpf = 1-0.6828-0.2838 = 0.0334

Re = Cost of equity = Rf + beta * Market risk premium = 4.2 + 1.08*8 = 12.84%

Cost of debt (pretax) =rate(nper,pmt,pv,fv) =rate(15*2,62/2,-1050,1000) *2 = 5.70%

Cost of debt (after tax) = Rd 5.7*(1-0.4) = 3.42%

Cost of preferred shares=Rpf = 5/72 = 6.94%

Hence WACC = We * Re + Wd*Rd + Wpf*Rpf

WACC= 0.6828* 12.84 + 0.2838*3.42 + 0.0334*6.94 = 9.9695%

WACC = 9.97%

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