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31 March, 07:41

You are given the following information for Lightning Power Co. Assume the company's tax rate is 35 percent.

Debt: 8,000 6.5 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 106 percent of par; the bonds make semiannual payments.

Common stock: 310,000 shares outstanding, selling for $57 per share; the beta is 1.05.

Preferred stock: 15,000 shares of 4 percent preferred stock outstanding, currently selling for $72 per share.

Market: 7 percent market risk premium and 4.5 percent risk-free rate.

What is the company's WACC? (Do not round intermediate calculations and round your answer to 2 decimal places. (e. g., 32.16))

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Answers (1)
  1. 31 March, 09:46
    0
    The company's WACC is 9.14%

    Explanation:

    cost of preferred stock

    = (dividend on preferred stock) / (current market price)

    = [$100*4%]/$72

    = 5.56%

    total finance = debt + equity + preferred stock

    = (8,000*$1,060) + (310,000*$57) + (15,000*$72)

    = $8,480,000 + $17,670,000 + $1,080,000

    = $27,230,000

    weight of debt = debt/total finance

    = $8,480,000/$27,230,000

    = 0.31

    weight on equity = equity/total finace

    = $1.080.000/$27,230,000

    = 0.04

    WACC

    = (weight of debt*after tax cost of debt) + (weight on equity*cost of equity)

    = (0.31*0.0393) + (0.65-0.1185) + (0.04*0.0556)

    = 9.14%

    Therefore, The company's WACC is 9.14%
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