Consider the following information for Watson Power Co.: Debt: 4,500 8 percent coupon bonds outstanding, $1,000 par value, 18 years to maturity, selling for 104 percent of par; the bonds make semiannual payments. Common stock: 112,500 shares outstanding, selling for $63 per share; the beta is 1.15. Preferred stock: 13,500 shares of 7 percent preferred stock outstanding, currently selling for $106 per share. Market: 10 percent market risk premium and 6 percent risk-free rate. Assume the company's tax rate is 35 percent. Find the WACC.
Multiple Choice
12.03%
11.86%
12.26%
12.8%
11.76%
rate positively ..
Rate of equity = | ||||||||
Using CAPM rate of equity = Risk free rate + market risk premium * beta | ||||||||
=6%+10%*1.15 | ||||||||
17.500% | ||||||||
Rate of debt (after tax) | ||||||||
we have to use financial calculator to compute YTM | ||||||||
Put in calcualtor | ||||||||
PV | -1040 | |||||||
FV | 1000 | |||||||
PMT | 1000*8%/2 | 40 | ||||||
N | 18*2 | 36 | ||||||
Compute I | 3.79% | |||||||
YTM = | 7.59% | |||||||
tax rate = | 35% | |||||||
therefore rate of debt (after tax) = | 4.93% | |||||||
rate of debt (after tax) = | 4.93% | |||||||
rate of preferred stock = Annual dividend/Current price | ||||||||
=7/106 | ||||||||
6.60% | ||||||||
Market value | weight | Cost of capital | weight * cost | |||||
Source | ||||||||
equity | 7087500 | =112500*63 | 53.70% | 17.50% | 9.40% | |||
debt | 4680000 | =4500*1000*104% | 35.46% | 4.93% | 1.75% | |||
preferred stock | 1431000 | =13500*106 | 10.84% | 6.60% | 0.72% | |||
13198500 | 11.86% | |||||||
Ans = | 11.86% |
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