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# Consider the following information for Watson Power Co.: Debt: 4,500 8 percent coupon bonds outstanding, \$1,000...

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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