E connect FINC 31O0 FALL 2017: FAL FINANCE CH 14 Question 4 (of 7) value 10.00 p
ID: 2806922 • Letter: E
Question
E connect FINC 31O0 FALL 2017: FAL FINANCE CH 14 Question 4 (of 7) value 10.00 points You are givery the following information for Lightning Power Co. Assume the company's tax rate is 40 percent 5 000 7 2 percent coupon bonds outstanding, $1,000 par value 30 years to maturity selling for 108 percent of par, the bonds make semiannual payments Debt Common stock 440 000 shares outstanding, selling for $62 per share, the beta is 1.05 Preterred stock 22 000 shares of 3 percent preferred stock outstanding, currently selling for $82 per share Market 11 percent market risk premium and 5 20 percent risk free rate What is the company's WACC? (Do not round intermediate calculations and round your final answer to 2 decimal places. te.o. 32.16)) WAC Hints ReferenceseBook & Resources Hint#1 SC F2 F3 F4 F5 F6 F7Explanation / Answer
Cost of debt= After tax cost of Yield to maturity
Yield to maturity = Coupon payments + [Facev value - Market price]/NUmber of years /Average price *100
Coupon payments = $1000*7.2%/2 = $36
Number of half years = 30*2 = 60
Average price = $1000+$1080 /2 = $1040
YTM = $36 + $1000-$1080/60 /$1040 *100
= $36-$1.3333/$1040 *100
= 3.33% or 6.67%
After tax YTM= 6.67*(1-0.40) = 4%
Cost of equity = Risk free rate + Risk premium*Beta
= 5.2+ 11*1.05
= 16.75%
Cost of preferance capital = Preferance dividend/MArket value of shares *100
= $3/$82 *100
= 3.66%
Total debt capital= 5000*1080 = $5400000
Total equity capital = 440000*62 = $27280000
Preferance capital = 22000*$82 = $1804000
Total capital = $34484000
Weight of Debt* After tax cost of debt = $5400000/$34484000 *4 = 0.63% -----A
Weight of equity * Cost of equity = 27280000/$34484000 *16.75 = 13.25 -----B
Weight of preferance shares * COst of preferance capital = $1804000/$34484000 *3.66 = 0.19 ---C
A+B+C = 0.63+13.25+0.19 = 14.07%
WACC = 14.07%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.