You are given the following information for Watson Power Co. Assume the company’

Question

You are given the following information for Watson Power Co. Assume the company’s tax rate is 22 percent. Debt: 22,000 7.1 percent coupon bonds outstanding, $1,000 par value, 21 years to maturity, selling for 107 percent of par; the bonds make semiannual payments. Common stock: 550,000 shares outstanding, selling for $73 per share; the beta is 1.17. Preferred stock: 24,500 shares of 4.9 percent preferred stock outstanding, currently selling for $94 per share. The par value is $100 per share. Market: 6 percent market risk premium and 5.2 percent risk-free rate. What is the company's WACC?

Explanation / Answer

Cost of equity=risk free rate+beta*market risk premium=5.2%+1.17*6%=12.22%
Cost of preferred stock=Preferred Dividend/Share price=4.9%*100/94=5.2128%
Cost of debt=2*RATE(21*2,7.1%/2*1000,-107%*1000,1000)=6.4851%
After-tax cost of debt=6.4851%*(1-22%)=5.0584%

WACC=(22000*107%*1000*5.0584%+24500*94*5.2128%+550000*73*12.22%)/(22000*107%*1000+24500*94+550000*73)=9.4209%

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