You are given the following information for Huntington Power Co. Assume the comp

Question

You are given the following information for Huntington Power Co. Assume the company’s tax rate is 38 percent.

Debt: 7,000 6.8 percent coupon bonds outstanding, $1,000 par value, 30 years to maturity, selling for 104 percent of par; the bonds make semiannual payments.

Common stock: 400,000 shares outstanding, selling for $58 per share; the beta is 1.14.

Market: 7 percent market risk premium and 4.80 percent risk-free rate.

What is the company's WACC? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

We will begin by finding the market value of each type of financing. We find:

MVD = 7,000 * ($1,000)(1.04) = $7,280,000

MVE = 400,000($58) = $23,200,000

And the total market value of the firm is:

V = $7,280,000 + $23,200,000 = $30,480,000

Now, we can find the cost of equity using the CAPM. The cost of equity is:

RE = 0.048 + 1.14(0.07) = 0.1278 or 12.78%

The cost of debt is the YTM of the bonds, so:

P0 = $1,040 = $34(PVIFAR%,60) + $1,000(PVIFR%,60)

R = 3.25%

YTM = 3.25% × 2 = 6.5%

And the aftertax cost of debt is:

RD = (1 – 0.38)(0.065) = 0.0403 or 4.03%

Now we have all of the components to calculate the WACC. The WACC is:

WACC = 0.1278(23200000/30480000) + 0.0403(7280000/30480000) = 0.1069 or 10.69%

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