Consider the following information for Evenflow Power Co., Debt: 3,500 6 percent

Question

Consider the following information for Evenflow Power Co., Debt: 3,500 6 percent coupon bonds outstanding, $1,000 par value, 19 years to maturity, selling for 104 percent of par; the bonds make semiannual payments. Common stock: 70,000 shares outstanding, selling for $56 per share; the beta is 1.18. Preferred stock: 10,500 shares of 5 percent preferred stock outstanding, currently selling for $107 per share. Market: 7.5 percent market risk premium and 5 percent risk-free rate. Assume the company's tax rate is 35 percent.

Explanation / Answer

market value weight cost weighted cost debt 3640000 0.42 3.9585 1.659347037 common stock 3920000 0.45 13.85 6.252317614 preferred stock 1123500 0.13 5% 0.006469166 8683500 WACCC 7.918133817 Re = (5+7.5*1.18) 13.85 EAR = (1.03^2)-1 = 6.09% Kd = 6.09%*(1-0.35) 3.9585

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