You are given the following information for Lightning Power Co. Assume the compa
ID: 2768303 • Letter: Y
Question
You are given the following information for Lightning Power Co. Assume the company’s tax rate is 40 percent. Debt: 5,000 7.8 percent coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 107 percent of par; the bonds make semiannual payments. Common stock: 500,000 shares outstanding, selling for $68 per share; the beta is 1.11. Preferred stock: 28,000 shares of 3 percent preferred stock outstanding, currently selling for $88 per share. Market: 9 percent market risk premium and 5.80 percent risk-free rate. What is the company's WACC? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
Explanation / Answer
Calculation of WACC:
E(R) = Rf + (Rm-Rf)
= 5.8 + 1.11(9)
= 15.79
Therefore, expected return for common stockholders is 15.79%
Portfolio
Amount
Weight
(1)
Cost of portfolio
(2)
WACC
(3) = (1) *(2)
7.8% coupon bonds
$ 5,000,000
0.121
0.04680
0.00564
Common stock
$ 34,000,000
0.820
0.15790
0.12948
Preferred stock
$ 2,464,000
0.059
0.03000
0.00178
Total
$ 41,464,000
1.000
0.13690
WACC is 0.13690 or 13.69%
Portfolio
Amount
Weight
(1)
Cost of portfolio
(2)
WACC
(3) = (1) *(2)
7.8% coupon bonds
$ 5,000,000
0.121
0.04680
0.00564
Common stock
$ 34,000,000
0.820
0.15790
0.12948
Preferred stock
$ 2,464,000
0.059
0.03000
0.00178
Total
$ 41,464,000
1.000
0.13690
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