Please show all work. I need to see the formulas in order to understand the ques

Question

Please show all work.

I need to see the formulas in order to understand the question

Do not use Microsoft Excel

Thank you

2. You are given the following information for Watson 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. 500,000 shares outstanding, selling for $68 per share; the beta is 1.11 28,000 shares of 3 percent preferred stock outstanding, currently selling for $88 per 9 percent market risk premium and 5.8 percent risk-free rate. Common stock: Preferred stock: Market: What is the company's WACC? (Do not round intermediate calculations. Enter yor answer asa percent rounded to 2 decimal places, e.g., 32.16.) WACC

Explanation / Answer

Answer:

Debt:

Number of Bonds Outstanding = 5,000
Par Value = $1,000
Current Price = 107%*$1,000 = $1,070

Value of Debt = 5,000 * $1,070
Value of Debt = $5,350,000

Annual Coupon Rate = 7.80%
Semi-annual Coupon Rate = 3.90%
Semi-annual Coupon = 3.90%*$1,000 = $39
Semi-annual Period to Maturity = 40 (20 years)

Let Semi-annual YTM be i%

Using financial calculator:
N = 40
FV = 1000
PV = 1070
PMT = 39
I/Y = 3.57%

Semi-annual Coupon Rate = 3.57%
Annual Coupon Rate = 2*3.57% = 7.14%
Before-tax Cost of Debt = 7.14%
After-tax Cost of Debt = 7.14%*(1-0.40)
After-tax Cost of Debt = 4.284%

Common Stock:

Number of shares outstanding = 500,000
Current Price = $68
Beta = 1.11
Risk-free rate = 5.8%
Market risk premium = 9%

Value of Common Stock = 500,000 * $68
Value of Common Stock = $34,000,000

Cost of Common Stock = risk-free rate + beta * market risk premium
Cost of Common Stock = 5.8% + 1.11 * 9%
Cost of Common Stock = 15.79%

Preferred Stock:

Number of shares outstanding = 28,000
Current Price = $88
Annual Dividend = 3%*$100 = $3.00

Value of Preferred Stock = 28,000 * $88
Value of Preferred Stock = $2,464,000

Cost of Preferred Stock = Annual Dividend / Current Price
Cost of Preferred Stock = $3.00 / $88
Cost of Preferred Stock = 3.41%

Value of Firm = Value of Debt + Value of Common Stock + Value of Preferred Stock
Value of Firm = $5,350,000 + $34,000,000 + $2,464,000
Value of Firm = $41,814,000

Weight of Debt = $5,350,000 / $41,814,000
Weight of Debt = 0.1280

Weight of Common Stock = $34,000,000 / $41,814,000
Weight of Common Stock = 0.8131

Weight of Preferred Stock = $2,464,000 / $41,814,000
Weight of Preferred Stock = 0.0589

WACC = Weight of Debt*After-tax Cost of Debt + Weight of Common Stock*Cost of Common Stock + Weight of Preferred Stock*Cost of Preferred Stock
WACC = 0.1280*4.284% + 0.8131*15.79% + 0.0589*3.41%
WACC = 13.59%

So, WACC of Company is 13.59%

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.