Information on Janicek Power Co., is shown below. Assume the company’s tax rate
ID: 2727222 • Letter: I
Question
Information on Janicek Power Co., is shown below. Assume the company’s tax rate is 35 percent. Debt: 10,000 8.6 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 96.5 percent of par; the bonds make semiannual payments. Common stock: 225,000 shares outstanding, selling for $84.50 per share; beta is 1.30. Preferred stock: 13,500 shares of 5.75 percent preferred stock outstanding, currently selling for $96.50 per share. Market: 7 percent market risk premium and 4.8 percent risk-free rate.
Explanation / Answer
Answer:
Ke=Rf+B(Erm-Rf)
=4.8%+1.30*7%
=13.9%
Kp=5.75/96.50=5.96%
Kd=
965=$43*PVIFA(r%,50)+$1000*PVIF(r%,50)
r=4.48%
R=4.48%*2=8.96%
Kd after tax=8.96%(1-0.35)=5.824%
Calculation of WACC:
Capital structure Market value Weight Cost of capital WACC Debt 9650000 0.322039696 5.82% 1.88% Preference share 1302750 0.043475359 5.96% 0.26% Common stock 19012500 0.634484945 13.90% 8.82% Total 29965250 1 10.95%