Question

# Information on Lightning Power Co., is shown below. Assume the company’s tax rate is 22 percent....

 Information on Lightning Power Co., is shown below. Assume the company’s tax rate is 22 percent.
 Debt: 18,200 6.1 percent coupon bonds outstanding, \$1,000 par value, 25 years to maturity, selling for 107.8 percent of par; the bonds make semiannual payments. Common stock: 620,000 shares outstanding, selling for \$85.25 per share; beta is 1.15. Preferred stock: 28,500 shares of 4.25 percent preferred stock outstanding, currently selling for \$92.70 per share. The par value is \$100. Market: 6.8 percent market risk premium and 3.4 percent risk-free rate.
 What is the company's cost of each form of financing? -cost equity % -aftertax cost of debt % -cost of preferred stock % Calculate the companys WACC %

Debt:

Number of bonds outstanding = 18,200
Face Value = \$1,000

Current Price = 107.80% * \$1,000
Current Price = \$1,078

Market Value of Debt = 18,200 * \$1,078
Market Value of Debt = \$19,619,600

Annual Coupon Rate = 6.10%
Semiannual Coupon Rate = 3.05%
Semiannual Coupon = 3.05% * \$1,000
Semiannual Coupon = \$30.50

Time to Maturity = 25 years
Semiannual Period to Maturity = 50

Let Semiannual YTM be i%

\$1,078 = \$30.50 * PVIFA(i%, 50) + \$1,000 * PVIF(i%, 50)

Using financial calculator:
N = 50
PV = -1078
PMT = 30.50
FV = 1000

I = 2.760%

Semiannual YTM = 2.76%
Annual YTM = 2 * 2.76%
Annual YTM = 5.52%

Before-tax Cost of Debt = 5.52%
After-tax Cost of Debt = 5.52% * (1 - 0.22)
After-tax Cost of Debt = 4.306%

Preferred Stock:

Number of shares outstanding = 28,500
Current Price = \$92.70

Annual Dividend = 4.25% * \$100
Annual Dividend = \$4.25

Market Value of Preferred Stock = 28,500 * \$92.70
Market Value of Preferred Stock = \$2,641,950

Cost of Preferred Stock = Annual Dividend / Current Price
Cost of Preferred Stock = \$4.25 / \$92.70
Cost of Preferred Stock = 4.585%

Common Stock:

Number of shares outstanding = 620,000
Current Price = \$85.25

Market Value of Common Stock = 620,000 * \$85.25
Market Value of Common Stock = \$52,855,000

Cost of Common Stock = Risk-free Rate + Beta * Market Risk Premium
Cost of Common Stock = 3.40% + 1.15 * 6.80%
Cost of Common Stock = 11.220%

Market Value of Firm = Market Value of Debt + Market Value of Preferred Stock + Market Value of Common Stock
Market Value of Firm = \$19,619,600 + \$2,641,950 + \$52,855,000
Market Value of Firm = \$75,116,550

Weight of Debt = \$19,619,600 / \$75,116,550
Weight of Debt = 0.2612

Weight of Preferred Stock = \$2,641,950 / \$75,116,550
Weight of Preferred Stock = 0.0352

Weight of Common Stock = \$52,855,000 / \$75,116,550
Weight of Common Stock = 0.7036

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 = 0.2612 * 4.306% + 0.0352 * 4.585% + 0.7036 * 11.220%
WACC = 9.18%

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