You are given the following information for Huntington Power Co. Assume the comp
ID: 2767121 • Letter: Y
Question
You are given the following information for Huntington Power Co. Assume the company’s tax rate is 40 percent.
7,000 6.2 percent coupon bonds outstanding, $1,000 par value, 15 years to maturity, selling for 105 percent of par; the bonds make semiannual payments.
What is the company's WACC? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))
You are given the following information for Huntington Power Co. Assume the company’s tax rate is 40 percent.
Explanation / Answer
Answer
find the market value of each type of financing:
MVD = 7,000($1,000)(1.05) = $7,350,000
MVE = 340,000($52) = $17,680,000
And the total market value of the firm is:
V = $7,350,000 + 17,680,000 = $25,030,000
Now, we can find the cost of equity using the CAPM. The cost of equity is:
RE = .042+ 1.08(.08) = .1284 or 12.84%
The cost of debt is the YTM of the bonds, so:
YTM = 5.70%
And the aftertax cost of debt is:
RD = (1 – .40)(.0570) = .0342 or 3.42%
Now we have all of the components to calculate the WACC. The WACC is:
WACC = .0342(735/2503) + .1284(1768/2503) = . 1007 or 10.07%
Notice that we didn’t include the (1 – tC) term in the WACC equation. We simply used the aftertax cost of debt in the equation, so the term is not needed here.