Information on Janicek Power Co., is shown below. Assume the company’s tax rate
ID: 2744616 • Letter: I
Question
Information on Janicek Power Co., is shown below. Assume the company’s tax rate is 30 percent.
Information on Janicek Power Co., is shown below. Assume the company's tax rate is 30 percent. Debt: 9, 200 8.2 percent coupon bonds outstanding, $1,000 par value, 23 years to maturity, selling for 101.5 percent of par; the bonds make semiannual payments. Common stock: 217,000 shares outstanding, selling for $83.70 per share; beta is 1.22. Preferred stock: 12, 700 shares of 5.85 percent preferred stock outstanding, currently selling for $97.30 per share. Market: 7.1 percent market risk premium and 4.9 percent risk-free rate. Required: 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).) WACC %Explanation / Answer
Each bond sells for 1,000 * 1.015 = 1015... times (" * ") 9200 bonds = $ 9,338,000
price: (1015) ; maturity value: 1,000
coupon: 1000 * 0.082 / 2 = 41
n = 23 * 2 = 46
IRR (YTM) = 8.2%
After- tax rate of debt "ATrd": 0.082 * ( 1 - 0.30) = 0.0574, or 5.74%
Common stock:
per CAPM: E(r) = RFR + ß(mkt risk premium)
= 4.9 + 1.22(7.1)
= 13.562% <rate common equity "re"
Total common: 217,000 * 83.70 = $18,162,900
Preferred stock:
rate preferred equity "rpe": 5.85%
total preferred: 12,700 * 97.30 = $1,235,710
Total capital (add up all values): $287,36,610
divide each component of capital by total capital to get weight of each component...
wd = 0.324951
we = 0.632047
wpe = 0.043001
WACC = wd(ATrd) + we(re) + wpe(rpe)
= 0.324951(0.0574) + 0.632047(0.13562) + 0.043001(0.0585)
=0.106886, or 10.69%
WACC = 10.69%