Question

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 $90.

Market: 7 percent market risk premium and 2.2 percent risk-free rate.

Answer 1

I Am a Debl-.e- Number of bonde outstanding 220000 - face values $ 1000 Current preces 96% 1000; 950. Value of Debt: 200000 950 2.19,000,000 $ Andlowl coupon late 2 684_ so semiannual loupon 2'60812 23.40% Therefore, semiani vay coupon iz 3,6% x 1000 3 834 Time to maturity = 20 years son semiannual period to Moutily z 20x 2 = ko. Calculate semiannual YTM i the financial calculator where in . N 40 PV = -950 PMT= 34. fv: 1000 $950 £ 34 x PV Cl, 40) + 1000 x PVLi, 4D) i Rate = 3, 639 %. Semiannually Rate : 3.63923 Anulal y TM 2.2.639 = 7..298%. & 2 I Before Alter Pax Pax Deft-cort 7.278 % . Debt cost = 7, 278 X L1 - 21% :-__-2.5.149%

B) Equity Number of outstanding share = 625,000 Ciflent Price a $5h per share value of tquily = 625,000x 5y = $33,750,000 - cost of Equity = = Ruik free Rate & Beta x Master Risk Prem 2.2% +1,20 x 7.00% 370.60% - Valuell of firm = value a common stockt Value of seat = 33,750,000+ 19,000,000__-.. -2 52,750,000 I weight of Equity = 33750,000/52,750,000 = 0.6398 weight of Albt = 19,000,000 | 82, 70,000 . 0. 3602 WACO = Weight of equily x cost of equily + weight of Debtx X After tax cost of Debt 096.3988_10.60 + 0.3602.X.5.749 12 6,78188 +2101078 8.85%
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