Problem 13-13 Finding the WACC Information on Huntington Power Co. is shown belo
ID: 2632230 • Letter: P
Question
Problem 13-13 Finding the WACC
Information on Huntington Power Co. is shown below. Assume the companys tax rate is 34 percent. Debt: 4,500 9 percent coupon bonds outstanding, $1,000 par value, 18 years to maturity, selling for 102 percent of par; the bonds make semiannual payments. Common stock: 103,500 shares outstanding, selling for $63 per share; the beta is 1.13. Market: 10 percent market risk premium and 8 percent risk-free rate.
Required: Calculate the WACC. (Do not include the percent sign (%). Round your answer to 2 decimal places. (e.g., 32.16))
Explanation / Answer
Hi,
Please find the detailed answer as follows:
Step 1: Calculate Cost of Debt:
Nper = 18*2 = 36 (indicates the period)
FV = 1000 (indicates the face value of bonds)
PV = 1000*102% = 1020 (indicates the current selling price)
PMT = 1000*1/2*9% = 45 (indicates the amount of semi-annual interest payment)
Rate = ? (indicates the cost of debt)
After Tax Cost of Debt = Rate(Nper,PMT,PV,FV)*2*(1-Tax Rate) = Rate(36,45,-1020,1000)*2*(1-34%) = 5.79%
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Calculate Cost of Equity
Cost of Equity = Risk Free Rate + Beta*(Market Risk Premium) = 8 + 1.13*10 = 19.3%
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Calculate WACC
WACC = After Tax Cost of Debt*Weight of Debt + Cost of Equity*Weight of Equity
WACC = (5.79*4500*1020)/(4500*1020 + 103500*63) + (19.3*103500*63)/(4500*1020 + 103500*63) = 13.72%
Answer is 13.72%.
Thanks.