Information on Huffington Power Co. is shown below. Assume the company\'s tax ra
ID: 2701900 • Letter: I
Question
Information on Huffington Power Co. is shown below. Assume the company's tax rate is 33 percent.
Debt: 5,500 5.5 percent coupon bonds outstanding, $1,000 par value, 21 years to maturity, selling for 103 percent of par; the bonds make semiannual payments.
Common stock: 110,000 shares outstanding, selling for $58 per share; the beta is 1.15.
Market: 6.5 percent market risk premium and 4 percent risk-free rate.
The weighted average cost of capital is ____________ % (round answer to 2 decimal places)
Explanation / Answer
Total bond value = 1030*5500 = 5,665,000
Semi-annual yield of bond is =RATE(42,5.5/2,-103,100,0) = 2.63%. So yield of bond = 2.63*2 = 5.26%
Post tax cost of debt = 5.26%*(1-33%) = 3.53%
Cost of equity = 4%+1.15*6.5% = 11.475%
Market value of equity = 110,000*58 = 6,380,000
Total firm value = 5,665,000+6,380,000 = 12,045,000
WACC = 5,665,000/12,045,000*3.53% + 6,380,000/12,045,000*11.475% = 7.74%