Question

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: 50,000 bonds with a 4.8 percent coupon outstanding, $1,000 par value, 15 years to maturity, selling for 105 percent of par; the bonds make semiannual payments.

Common stock: 825,000 shares outstanding, selling for $72 per share; the beta is .99.

Preferred 65,000 shares of 3.8 percent preferred stock outstanding, currently stock: selling for $60 per share. Assume par value is $95.

Market: 8 percent market risk premium and 3.2 percent risk-free rate.

Can you please do this in Excel. Thank You :)

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Answer #1

WACC (Weighted Average Cost of Capital)=( Total Equity/ value of the firm)* cost of Equity +(Total Debt/ Value)* cost of debt* (1- tax)+ Total Pref. share/ Value of Firm

OR = E/V*Re + D/V*Rd* (1-Tc) + P/V*RP

Value of firm= E+D+P

Given in the question

Tax rate= 21%

Debts= 50000 bonds* $1000= $50,000,000.00 (with maturity of 15 years)

Market Value of Debt= 50000 bonds* $1050 (105% of Par)= $52,500,000.00

Rd= 4.80%

Comman Stock= 825000* $72 = $59,400,000.00

Beta= 0.99

Pref. stock= 65000* $60= $3900000.00 (par value $95)

RP (rate of pref. sh)=3.80%

risk premium (Rp)= (Market rate (Rm)- risk free rate (Rf)) =8%,

Rf= 3.2%

Calculation: Re (By CAPM Model) = Rf + Risk Premium*beta= 3.2% + 8*99= 3.20% + 7.92%= 11.12%

Hence Re= 11.12% (By CAPM Model)

Value of firm= E+D+P=

$115,800,000.00

WACC= 7.5512% (Refer Excel calculation below as per formula mentioned= E/V*Re + D/V*Rd* (1-Tc) + P/V*RP)

CAPM Model
Paticulars rate
Rp 8%
Rf 3.20%
Beta 0.99
Re 11.12%
WACC
Re 11.12% Market Value of Equity $59,400,000.00
Rd 4.80% Market Value of Debt $52,500,000.00
E/V 0.512953 Market Value of Pref. share $3,900,000.00
D/V 0.453368 Value of the Firm $115,800,000.00
P/V 0.033679
Tax 21%
1-tax 79%
RP (rate of pref. sh) 3.80%
WACC 7.5512%
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