Information on Janicek Power Co., is shown below. Assume the company\'s tax rate
ID: 2719545 • Letter: I
Question
Information on Janicek Power Co., is shown below. Assume the company's tax rate is 40 percent. Debt: 9,400 8.4 percent coupon bonds outstanding, $1,000 par value, 21 years to maturity, selling for 100.5 percent of par; the bonds make semiannual payments. Common stock: 219,000 shares outstanding, selling for $83.90 per share; beta is 1.24. Preferred stock: 12,900 shares of 5.95 percent preferred stock outstanding, currently selling for $97.10 per share. Market: 7.2 percent market risk premium and 5 percent risk-free rate. 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).)Explanation / Answer
Step1, calculate the cost of the bond and its market value
1000*100.5% = 1000*8.4%/2*PVIFA(i/2,42) + 1000PVIF(i/2,42) = 1000*8.4%/2*(1+(1+i/2)^(-42))/(i/2) + 1000*(1+i/2)^(-42)
i = 8.35%
market value of the bond = 9400*1000*100.5% = 9,447,000
Step2, calculate the cost of common stock
Rs = 5% + 1.24*7.2% = 13.928%
market value of common stock = 219,000*83.90 = 18,374,100
Step3, calculate the cost of preferred stock
Rps = 5.95%
market value of preferred stock = 12,900*97.10 = 1,252,590
Step4, calculate the WACC
WACC = 8.35%*(1-40%)*9,447,000/(9,447,000+18,374,100+1,252,590) + 13.928%*18,374,100/(9,447,000+18,374,100+1,252,590) + 5.95%*1,252,590/(9,447,000+18,374,100+1,252,590) = 10.69%
The answer is 10.69%