Is Not wh rate of rol 0.40) IEB Wireframe 15. Finding the WACC. Given the follow

Question

Is Not wh rate of rol 0.40) IEB Wireframe 15. Finding the WACC. Given the following information for Gerken Power Co., find the WACC. he company's tax rate is 35 percent. 15,500 6.4 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 108 percent of par, the bonds make semiannual payments. 495,000 shares outstanding, selling for $81 per share; Debt: Common stock: Preferred stock: Market beta is 1.20 20,000 shares of 4.2 percent preferred stock outstanding, currently selling for $92 per share. 7 percent market risk premium and 3.1 percent risk free rate. LO 3 16. Finding the WACC. Hankins Corporation has 5.4 million shares of common stock outstanding, 29 shares of 5.6 percent preferred stock outstanding, and 125,000 of 6.7 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $64 per share and has a b 1.13. the preferred stock currently sells for $103 per share, and the bonds have 20 years to maturity Il for 109 nercent of par. The market risk premium is 6.8 percent, T-bills are yielding 4.3 percent

Explanation / Answer

Answer to Question No. 15

Debt:

Value of Debt = 15,500 * $1,000 * 1.08
Value of Debt = $16,740,000

Face Value of Bonds = $1,000
Current Price = $1,080
Annual Coupon Rate = 6.4%
Semi-annual Coupon Rate = 3.2%
Semi-annual Coupon = 3.20%*$1,000 = $32
Semi-annual Period to Maturity = 50 (25 years)

Let Semi-annual YTM be i%

$1,080 = $32 * PVIFA(i%, 50) + $1,000 * PVIF(i%, 50)
Using financial calculator, i = 2.90%

Semi-annual YTM = 2.90%
Annual YTM = 2 * 2.90%
Annual YTM = 5.80%

Before-tax Cost of Debt = 5.80%
After-tax Cost of Debt = 5.80%*(1-0.35)
After-tax Cost of Debt = 3.77%

Common Stock:

Value of Common Stock = 495,000 * $81
Value of Common Stock = $40,095,000

Cost of Common Equity = Risk-free Rate + Beta * Market Risk Premium
Cost of Common Equity = 3.1% + 1.20*7%
Cost of Common Equity = 11.50%

Preferred Stock:

Value of Preferred Stock = 20,000 * $92
Value of Preferred Stock = $1,840,000

Par Value = $100
Annual Dividend = $100*4.20%
Annual Dividend = $4.20

Cost of Preferred Stock = Annual Dividend / Current Price
Cost of Preferred Stock = $4.20 / $92
Cost of Preferred Stock = 4.57%

Value of Firm = Value of Debt + Value of Common Stock + Value of Preferred Stock
Value of Firm = $16,740,000 + $40,095,000 + $1,840,000
Value of Firm = $58,675,000

Weight of Debt = $16,740,000 / $58,675,000
Weight of Debt = 28.53%

Weight of Common Stock = $40,095,000 / $58,675,000
Weight of Common Stock = 68.33%

Weight of Preferred Stock = $1,840,000 / $58,675,000
Weight of Preferred Stock = 3.14%

WACC = Weight of Debt*After-tax Cost of Debt + Weight of Preferred Stock*Cost of Preferred Stock + Weight of Common Stock*Cost of Common Stock
WACC = 28.53%*3.77% + 3.14%*4.57% + 68.33%*11.50%
WACC = 9.08%

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