Question

# 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: 6 percent market risk premium and 5.1 percent risk-free rate. What is the company's WACC?

 MV of equity=Price of equity*number of shares outstanding MV of equity=64*460000 =29440000 MV of Bond=Par value*bonds outstanding*%age of par MV of Bond=1000*13000*1.08 =14040000 MV of Preferred equity=Price*number of shares outstanding MV of Preferred equity=85*20000 =1700000 MV of firm = MV of Equity + MV of Bond+ MV of Preferred equity =29440000+14040000+1700000 =45180000 Weight of equity = MV of Equity/MV of firm Weight of equity = 29440000/45180000 W(E)=0.6516 Weight of debt = MV of Bond/MV of firm Weight of debt = 14040000/45180000 W(D)=0.3108 Weight of preferred equity = MV of preferred equity/MV of firm Weight of preferred equity = 1700000/45180000 W(PE)=0.0376 Cost of equity As per CAPM Cost of equity = risk-free rate + beta * (Market risk premium) Cost of equity% = 5.1 + 1.13 * (6) Cost of equity% = 11.88 Cost of debt K = Nx2 Bond Price =∑ [(Semi Annual Coupon)/(1 + YTM/2)^k]     +   Par value/(1 + YTM/2)^Nx2 k=1 K =28x2 1080 =∑ [(6.2*1000/200)/(1 + YTM/200)^k]     +   1000/(1 + YTM/200)^28x2 k=1 YTM = 5.6290145584 After tax cost of debt = cost of debt*(1-tax rate) After tax cost of debt = 5.6290145584*(1-0.23) = 4.334341209968 cost of preferred equity cost of preferred equity = Preferred dividend/price*100 cost of preferred equity = 4/(85)*100 =4.71 WACC=after tax cost of debt*W(D)+cost of equity*W(E)+Cost of preferred equity*W(PE) WACC=4.33*0.3108+11.88*0.6516+4.71*0.0376 WACC =9.26%

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