Problem 12-15 Finding the WACC [LO 3] 9,300 8.3 percent coupon bonds outstanding
ID: 2767362 • Letter: P
Question
Problem 12-15 Finding the WACC [LO 3]
9,300 8.3 percent coupon bonds outstanding, $1,000 par value, 22 years to maturity, selling for 101 percent of par; the bonds make semiannual payments.
12,800 shares of 5.9 percent preferred stock outstanding, currently selling for $97.20 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).)
Information on Janicek Power Co., is shown below. Assume the company’s tax rate is 38 percent.Explanation / Answer
The formula to calculate company WACC is
WACC = (Equity / Total Capital) * Cost of Equity + (Debt / Total Capital) * Cost of Debt * (1 - Tax Rate) + (Preferred Share Equity / Total Capital) * Cost of Preferred Share Equity
We will calculate the cost of equity by using CAPM model , the formula is
E(R) = Rf + ß( Rmarket - Rf )
E(R) = 4,95 +1.23(7.15-4.95)
E(R) = 7.656 %
We will calculate the cost of preference shares The cost of preferred share equity is the value of preferred dividends divided by the price per share.
cost of preference share = 5.9 /97.20 x 100 = 6.07%
The cost of debt is the YTM of the bonds, so:
P0 = $1,010 = $41.5(PVIFAR%,44) + $1,000(PVIFR%,44)
YTM = 4.10% × 2 = 8.2%
And the aftertax cost of debt is:
RD = (1 – 0.38)(0.082) = 0.05084 or 5.084%
Now we will calculate the market value of each category of determine total capital
MVD = 9,300($1,000)(1.01) = $9,393,000
MVE = 218,000($83.80) = $18,268,400
MVP = 12,800($97.20) = $1,244,160
And the total market value of the firm is:
V = $9,393,000 + $18,268,400+$1,244,160 = $28,905,560
Putting the value in formula, note we have adjusted tax element in cost of debt calculation
WACC = 7.656%(18.2684/28.90556) + 5.084%(9.393/28.90556) + 6.07%(1.24416/28.90556)
= 0.0484 +0.0165+0.0026
=0.0675 0r 6.75%
the WACC is 6.75%