Information on Janicek Power Co., is shown below. Assume the companys tax rate i
ID: 2752710 • Letter: I
Question
Information on Janicek Power Co., is shown below. Assume the companys tax rate is 35 percent. Debt: 8,500 7.2 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 118 percent of par; the bonds make semiannual payments. Common stock: 225,000 shares outstanding, selling for $87 per share; beta is 1.15. Preferred stock: 15,000 shares of 4.8 percent preferred stock outstanding, currently selling for $98 per share. Market: 7 percent market risk premium and 3.1 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)
Explanation / Answer
Answer:
Here
Common stock:
Current Market price = $87
Beta= 1.15
Risk free rate = Rf = 3.1%
Market risk premium = 7%
Therefore cost of equity = Ke = 3.1% + 1.15 x 7% = 11.15%
And market value of equity = 225000 x $87 = $19,575,000
Preferred stock:
Cost of preferred stock = Kp = 4.8%
Market value of preferred stock = 15,000 x $98 = $1,470,000
Debt:
Cost of debt = Kd = 7.2%
Market value of debt = 8500 x $1180 = $10,030,000
Total value of capital = $31,075,000
Thus,
Weight of common stock = 0.6299
Weight of preferred stock = 0.0473
Weight of debt = 0.3228
Therefore,
WACC = 0.6299 x 11.15% + 0.0473 x 4.8% + 0.3228 x 7.2% = 9.496%