FYI, the answer is NOT 7.16% You are given the following information for Hunting

Question

FYI, the answer is NOT 7.16%

You are given the following information for Huntington Power Co. Assume the company's tax rate is 40 percent. Debt: 8,000 7.5 percent coupon bonds outstanding. $1,000 par value, 25 years to maturity, selling for 104 percent of par: the bonds make semiannual payments. Common stock: 470,000 shares outstanding, selling for $65 per share; the beta is 1.08. Market: 8 percent market risk premium and 5.5 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

Step 1:

1) Cost of Common Stock = Rf + (Rm-Rf)*Beta

Cost of Common Stock = 5.5 + 8*1.08

Cost of Common Stock = 14.14%

2) Before Tax Cost of Debt = rate(nper,pmt,pv,fv) *2

Before Tax Cost of Debt = rate(50,37.5,-1040,1000) * 2

Before Tax Cost of Debt = 7.15 %

After Tax Cost of Debt = Before Tax Cost of Debt *(1-tax rate)

After Tax Cost of Debt = 7.15*(1-40%)

After Tax Cost of Debt = 4.29%

Step 2:

Market Value of Common Stock = 470000 * 65 = $ 30,550,000

Market Value of Bond = 8000*1000*104% = $ 8,320,000

Total Market Value = 30,550,000 + 8320000 = 38,870,000

Weight of Common Stock = 30,550,000/38,870,000 = 78.60%

Weight of Debt = 8,320,000/38,870,000 = 21.40%

Step3:

WACC = Weight of Common Stock* Cost of Common Stock+ Weight of Debt* After Tax cost of Debt

WACC = 78.60%*14.14 + 21.40%*4.29

WACC = 12.03%

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