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 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

Answer to the Question

Cost of Equity=R(f)+Beta*(R(m)-R(f))

=5.8%+1.11*9%

=15.79%.

After tax cost of Debt=7.8%*(1-40%)

=4.68%.

Cost of Preferred stock=3%.

WACC 14.78%.

TYPE Cost of Finance Value Weight WACC Debt 4.68%             535,000                    0.014 0.07% Preferred Stock 3.00%          2,464,000                    0.067 0.20% Common stock 15.79%         34,000,000                    0.919 14.51% Total         36,999,000 14.78%

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