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 40 percent.

7,000 6.2 percent coupon bonds outstanding, $1,000 par value, 15 years to maturity, selling for 105 percent of par; the bonds make semiannual payments.

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).)

You are given the following information for Huntington Power Co. Assume the company’s tax rate is 40 percent.

Explanation / Answer

Market value

Debt = 7000*1000*105% = $7,350,000

Common Stock = 340,000*52 = $ 17,680,000

Total market value = 25,030,000

Weights

Weight of Debt = 7,350/25,030

Weight of common stock = 17,680/25,030

Cost of common stock =risk-free rate + market risk premium* Beta

Cost of common stock = 4.2 + 8*1.08

Cost of common stock = 12.84%

Cost of debt =6.2(1-Tax rate)

Cost of Debt = 6.2*0.6

                      =3.72

WACC = Cost of after tax debt*Weight of Debt + Cost of common stock*Weight of common stock

WACC = 3.72%*7,350/25,030 + 12.84%*17,680/25,030

= 3.72%*0.29+12.84%*0.706

=1.089+9.065

=10.15%

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