Information on Janicek Power Co., is shown below. Assume the company’s tax rate
ID: 2752493 • Letter: I
Question
Information on Janicek Power Co., is shown below. Assume the company’s tax rate is 38 percent.
10,300 8.9 percent coupon bonds outstanding, $1,000 par value, 22 years to maturity, selling for 95 percent of par; the bonds make semiannual payments.
13,800 shares of 5.9 percent preferred stock outstanding, currently selling for $96.20 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).)
Debt:10,300 8.9 percent coupon bonds outstanding, $1,000 par value, 22 years to maturity, selling for 95 percent of par; the bonds make semiannual payments.
Common stock: 228,000 shares outstanding, selling for $84.80 per share; beta is 1.33. Preferred stock:13,800 shares of 5.9 percent preferred stock outstanding, currently selling for $96.20 per share.
Market: 7.15 percent market risk premium and 4.95 percent risk-free rate.Explanation / Answer
Post Tax Cost of Debt(Kd) = [1000*0.089*(1-0.38)] / (1000*0.95) = 5.81%
Ke = rf + market risk premium x beta = 4.95 + 7.15*1.33 = 14.46%
Kp = (100*0.059) / 96.2 = 6.13%
Market value of Debt = 10300 x 950 = $9,785,000
Market value of Equity = 228000 x 84.8 = $19,334,400
Market value of preferred stock = 13800 x 96.2 = $1,327,560
Total market value = 9785000 + 19334400 + 1327560 = $30,446,960
WACC = [(9785000*5.81%) + (19334400*14.46%) + (1327560*6.13%)] / 30446960 = 11.32%