Given the following information for King Power Co., find the requested answers.

Question

Given the following information for King Power Co., find the requested answers. 2 Debt 50,000 bonds outstanding currently trading at $927.87 per bond. The face value is $1,000. The bonds have a 5.2% coupon rate and coupon payments are made semi-annually.The bond has 17 years remaining to maturity 4 Preferred Stock: 150,000 shares that are currently trading for $97.20 per share. The preferred stock is paying an annual dividend of 5 S4.75 per share Common Stock: 900,000 shares outstanding with current market price of $74.17 per share. The firm is expected to announce a $5.20 per share for next year, the growth rate is 3.15%. The market risk premium is 7.00% and the risk free rate is 1.25%. The firm beta is 1.2 Assume a 34% tax rate 1 CAPM: RERrf B(market risk premium) 3 Dividend Growth Model: RED1/P+ g 5 Preferred Stock: Rp- D/Po INSERT EQUATIONSIANSWERS IN HIGHLIGHTED CELLS!! 6 Current Market Value Capital Structure Before-tax Cost of Debt After-tax Cost of Debt Cost of Preferred Stock Cost of Equity CAPM Cost of Equity Dividend Growth Model Cost of Equity average WACC 8 %-Debt 2 Preferred %-Preferred 4

Explanation / Answer

CAPM = 1.25% + 1.2*7%

= 9.65%

Price of stock = D1 / Re - g

74.17 = 5.2 / Re - 0.0315

Re(cost of equity-DDM)  = 10.2%

Cost of equity average = (10.2%+9.65%)/2

= 9.9%

Preferred stock Rp = D / P0

= 4.75/97.2

= 4.88%

before tax cost of debt = 2.94%

after tax cost of debt = 2.94%*(1-0.34)

= 1.94%

WACC

therefore, the WACC is 6.44%

Current market value Capital Structure Cost of capital Weigheted cost Debt $4,63,93,500 % debt 0.36 1.94% 0.01 Preferred $1,45,80,000 % preferred 0.11 4.88% 0.01 Equity $6,67,53,000 % equity 0.52 9.90% 0.05 Total $12,77,26,500 1 6.44%

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