You are given the following information for Huntington Power Co. Assume the comp
ID: 2797727 • Letter: Y
Question
You are given the following information for Huntington Power Co. Assume the company’s tax rate is 40 percent.
7,000 7.4 percent coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 103 percent of par; the bonds make semiannual payments.
What is the company's WACC? (Do not round intermediate calculations and 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
Cost of debt
Bond price = Coupon1/(1+cost of debt) + Coupon2/(1+cost of debt)2 + Coupon3/(1+cost of debt)3 + ....... + (Coupon40+face value)/(1+cost of debt)40
Semiannual Coupon = 7.4%/2 * 1000 = 37
Bond price = 103% * 1000 = 1030
1030 = 37/(1+cost of debt) + 37/(1+cost of debt)2 + 37/(1+cost of debt)3 + .......... + 1037/(1+cost of debt)40
Cost of debt = 3.56%
Annual cost of debt = 3.56 * 2 = 7.12%
Cost of equity = 5.4 + 1.07 * (7)
Cost of equity = 12.89%
After tax debt = 7.12 * (1 - 0.40)
After tax debt = 4.272%
total capital = equity + debt
total capital = 29,440,000 + 7,210,000 (7000*1030)
total capital = $36,650,000
Equity/capital = 29440000/36650000 = 0.80
Debt/capital = 1 - 0.80 = 0.20
WACC = Equity/capital * cost of equity + Debt/capital * after tax cost of debt
WACC = 0.80 * 12.89% + 0.20 * 4.272%
WACC = 10.312 + 0.8544
WACC = 11.17%
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