Question

You are given the following information for Lightning Power Co. Assume the companys tax rate is 24 percent. Debt 24.000 73 p

0 0
Add a comment Improve this question Transcribed image text
Answer #1

Answer:

Debt:

Number of bonds outstanding = 24,000
Face Value = $1,000
Current Price = 107% * $1,000 = $1,070

Value of Debt = 24,000 * $1,070
Value of Debt = $25,680,000

Annual Coupon Rate = 7.30%
Semiannual Coupon Rate = 3.65%
Semiannual Coupon = 3.65% * $1,000 = $36.50

Time to Maturity = 18 years
Semiannual Period to Maturity = 36

Let semiannual YTM be i%

$1,070 = $36.50 * PVIFA(i%, 36) + $1,000 * PVIF(i%, 36)

Using financial calculator:
N = 36
PV = -1070
PMT = 36.50
FV = 1000

I = 3.31%

Semiannual YTM = 3.31%
Annual YTM = 2 * 3.31%
Annual YTM = 6.62%

Before-tax Cost of Debt = 6.62%
After-tax Cost of Debt = 6.62% * (1 - 0.24)
After-tax Cost of Debt = 5.03%

Common Stock:

Number of shares outstanding = 570,000
Current Price = $75

Value of Common Stock = 570,000 * $75
Value of Common Stock = $42,750,000

Cost of Common Equity = Risk-free Rate + Beta * Market Risk Premium
Cost of Common Equity = 4.9% + 1.19 * 6.0%
Cost of Common Equity = 12.04%

Preferred Stock:

Number of shares outstanding = 25,500
Current Price = $96
Annual Dividend = 5.10% * $100 = $5.10

Value of Preferred Stock = 25,500 * $96
Value of Preferred Stock = $2,448,000

Cost of Preferred Stock = Annual Dividend / Current Price * 100
Cost of Preferred Stock = $5.10 / $96 * 100
Cost of Preferred Stock = 5.31%

Value of Firm = Value of Debt + Value of Common Stock + Value of Preferred Stock
Value of Firm = $25,680,000 + $42,750,000 + $2,448,000
Value of Firm = $70,878,000

Weight of Debt = $25,680,000 / $70,878,000
Weight of Debt = 0.3623

Weight of Common Stock = $42,750,000 / $70,878,000
Weight of Common Stock = 0.6031

Weight of Preferred Stock = $2,448,000 / $70,878,000
Weight of Preferred Stock = 0.0345

WACC = Weight of Debt*After-tax Cost of Debt + Weight of Common Stock*Cost of Common Stock + Weight of Preferred Stock*Cost of Preferred Stock
WACC = (0.3623 * 5.03%) + (0.6031 * 12.04%) + (0.0345 * 5.31%)
WACC = 9.27%

Add a comment
Know the answer?
Add Answer to:
You are given the following information for Lightning Power Co. Assume the company's tax rate is...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
  • You are given the following information for Lightning Power Co. Assume the company’s tax rate is...

    You are given the following information for Lightning Power Co. Assume the company’s tax rate is 23 percent. Debt: 13,000 6.2 percent coupon bonds outstanding, $1,000 par value, 28 years to maturity, selling for 108 percent of par; the bonds make semiannual payments. Common stock: 460,000 shares outstanding, selling for $64 per share; beta is 1.13. Preferred stock: 20,000 shares of 4 percent preferred stock outstanding, currently selling for $85 per share. The par value is $100 per share. Market:...

  • 10 Information on Lightning Power Co., is shown below. Assume the company's tax rate is 21...

    10 Information on Lightning Power Co., is shown below. Assume the company's tax rate is 21 percent Debt: 16,000 6.2 percent coupon bonds outstanding. $1,000 par value, 25 years to maturity, selling for 108 percent of par; the bonds make semiannual payments. Skipped Common stock Preferred stock 535,000 shares outstanding, selling for $81 per share: beta is 1.20. 20.000 shares of 4.2 percent preferred stock outstanding, currently selling for $92 per share. The par value is $100. Market 7 percent...

  • You are given the following information for Watson Power Co. Assume the company's tax rate is...

    You are given the following information for Watson Power Co. Assume the company's tax rate is 40 percent. Debt: 5,000 6.6 percent coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 109 percent of par; the bonds make semiannual payments. 380,000 shares outstanding, selling for $56 per share; the beta is 1.12. 16,000 shares of 3 percent preferred stock outstanding, currently selling for $76 per Common stock: Preferred stock: share. Market: 5 percent market risk premium and...

  • You are given the following information for Watson Power Co. Assume the company's tax rate is...

    You are given the following information for Watson Power Co. Assume the company's tax rate is 22 percent. Debt: 7,000 5.6 percent coupon bonds outstanding. $1,000 par value, 22 years to maturity, selling for 104 percent of par; the bonds make semiannual payments. Common stock: 400,000 shares outstanding, selling for $58 per share; the beta is 1.09. Preferred stock: 17,000 shares of 3.4 percent preferred stock outstanding, currently selling for $79 per share. The par value is $100 per share....

  • You are given the following information for Huntington Power Co. Assume the company's tax rate is...

    You are given the following information for Huntington Power Co. Assume the company's tax rate is 22 percent. 27000 4.6 percent coupon bonds outstanding, $2,000 par value, 21 years to maturity, selling for 104 percent of par; the bonds make semiannual payments Debt: Common stock: 455,000 shares outstanding, selling for $73 per share; the beta is 1.07 Market: 6 percent market risk premium and 3.8 percent risk-free rate What is the company's WACC? (Do not round intermediate calculations and enter...

  • 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.    ...

  • You are given the following information for Huntington Power Co. Assume the company's tax rate is...

    You are given the following information for Huntington Power Co. Assume the company's tax rate is 23 percent. Debt: 28,000 4.7 percent coupon bonds outstanding, $2,000 par value, 23 years to maturity, selling for 103 percent of par; the bonds make semiannual payments. Common stock: 460,000 shares outstanding, selling for $74 per share; the beta is 1.08. Market: 7 percent market risk premium and 3.9 percent risk-free rate. What is the company's WACC? (Do not round intermediate calculations and enter...

  • You are given the following information for Magrath Power Co. Assume the company’s tax rate is...

    You are given the following information for Magrath Power Co. Assume the company’s tax rate is 35%. Debt: 10,000 6.4% coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 108% of par; the bonds make semiannual payments. Common stock: 495,000 shares outstanding, selling for $63 per share; the beta is 1.15. Preferred stock: 35,000 shares of 3.5% preferred stock outstanding, currently selling for $72 per share. Market: 7% market risk premium and 3.2% risk-free rate. What is...

  • You are given the following information for Magrath Power Co. Assume the company’s tax rate is...

    You are given the following information for Magrath Power Co. Assume the company’s tax rate is 35%. Debt: 10,000 6.4% coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 108% of par; the bonds make semiannual payments. Common stock: 495,000 shares outstanding, selling for $63 per share; the beta is 1.15. Preferred stock: 35,000 shares of 3.5% preferred stock outstanding, currently selling for $72 per share. Market: 7% market risk premium and 3.2% risk-free rate. What is...

  • Given the following information for Watson Power Co., find the WACC. Assume the company’s tax rate...

    Given the following information for Watson Power Co., find the WACC. Assume the company’s tax rate is 21 percent. Debt: 20,000 bonds with a 6.8 percent coupon outstanding, $1,000 par value, 20 years to maturity, selling for 95 percent of par; the bonds make semiannual payments. Common stock: 625,000 shares outstanding, selling for $54 per share; the beta is 1.20. Preferred 45,000 shares of 2.8 percent preferred stock outstanding, currently stock: selling for $60 per share. Assume par value is...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT