Problem 12-15 Finding the WACC ILO 3J Information on Janicek Power Co., is shown
ID: 2650922 • Letter: P
Question
Problem 12-15 Finding the WACC ILO 3J Information on Janicek Power Co., is shown below. Assume the company's tax rate is 34 percent. Debt 8,600 7.9 percent coupon bonds outstanding, $1,000 par value, 24 years to maturity, selling for 104.5 percent of par, the bonds make semiannual payments Common stock 211,000 shares outstanding, selling for $83.10 per share; beta is 1.16. Preferred stock: 12,100 shares of 5.8 percent preferred stock outstanding, currently selling for $97.90 per share. Market: 7.05 percent market risk premium and 4.85 percent risk-free rate Required: What is the companys cost of each form of financing? (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).) Cost Cost of equity Aftertax cost of debt Cost of preferred stock Calculate the company's WACC. (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).) WACCExplanation / Answer
Step 1:
1) Cost of Common Stock = Rf + (Rm-Rf)*Beta
Cost of Common Stock = 4.85 + 7.05*1.16
Cost of Common Stock = 13.03%
2) Cost of Preferred Stock = 5.8/97.90
Cost of Preferred Stock = 5.92%
3) Before Tax Cost of Debt = rate(nper,pmt,pv,fv) *2
Nper (indicates the semi annual period) = 24*2 = 48
PV (indicates the price) = 1000*104.5% = 1045
PMT (indicate the semi annual payment) = 1000*7.9%*1/2 = 39.50
FV (indicates the face value) = 1000
Rate (indicates YTM) = ?
Before Tax Cost of Debt = rate(48,39.50,-1045,1000) * 2
Before Tax Cost of Debt = 7.493 %
After Tax Cost of Debt = 7.493*(1-34%)
After Tax Cost of Debt = 4.95%
Step 2:
Market Value of Common Stock = 211000*83.10 = 17534100
Market value of Preferred Stock =12100*97.90 = $ 1184590
Market Value of Bond = 8600*1045 = $ 8987000
Total Market Value = 17534100 + 1184590 + 8987000 = $ 27,705,690
Weight of Common Stock = 17534100/27705690 = 63.287%
Weight of Preferred Stock =1184590/27705690 =4.276%
Weight of Debt = 8987000/27705690 = 32.437%
Step3:
WACC = Weight of Common Stock* Cost of Common Stock + Weight of Preferred Stock* Cost of Preferred Stock + Weight of Debt* After Tax cost of Debt
WACC = 63.287%*13.03 + 4.276%*5.92 + 32.437%*4.95
WACC = 10.10%
Answer
a) Cost of Equity = 13.03%
After Tax Cost of Debt = 4.95%
Cost of Prefered stock = 5.92%
b) WACC = 10.10%