Problem 12-15 Finding the WACC [LO 3] 9,000 8 percent coupon bonds outstanding,
ID: 2719195 • Letter: P
Question
Problem 12-15 Finding the WACC [LO 3]
9,000 8 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 102.5 percent of par; the bonds make semiannual payments.
12,500 shares of 5.75 percent preferred stock outstanding, currently selling for $97.50 per share.
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).)
Information on Janicek Power Co., is shown below. Assume the company’s tax rate is 35 percent.Explanation / Answer
Step 1:
1) Cost of Common Stock = Rf + (Rm-Rf)*Beta
Cost of Common Stock = 4.8 + 7*1.2
Cost of Common Stock = 13.2%
2) Cost of Preferred Stock = 5.75/97.50
Cost of Preferred Stock = 5.90%
3) Before Tax Cost of Debt = rate(nper,pmt,pv,fv) *2
Before Tax Cost of Debt = rate(50,40,-1025,1000) * 2
Before Tax Cost of Debt = 7.77 %
After Tax Cost of Debt = Before Tax Cost of Debt *(1-tax rate)
After Tax Cost of Debt = 7.77*(1-35%)
After Tax Cost of Debt = 5.05%
Step 2:
Market Value of Common Stock = 215000*83.50 = $ 17952500
Market value of Preferred Stock = 12500*97.50 = 1218750
Market Value of Bond = 9000*1025 = 9225000
Total Market Value = $ 28396250
Weight of Common Stock = 17952500/28396250 = 0.6322
Weight of Preferred Stock =1218750/28396250 = 0.0429
Weight of Debt = 9225000/28396250 = 0.3249
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 = 0.6322*13.2 + 0.0429*5.90 + 0.3249*5.05
WACC = 10.24%
Answer
WACC = 10.24%