Part 2: 3 multiple-step problems, 7.5 points each, for total of 22.5 Problem 1 p

Question

Part 2: 3 multiple-step problems, 7.5 points each, for total of 22.5 Problem 1 points ven the following information for Lightning Power Co., find the WACC. Assume the company's tax rate is 35 percent. Debt: 8,000 Common Stock Preoc:3,00 shares outstanding, selling for $77 per share; the Beta is 1.15. The preferred stock pays an annual fixed dividend of S4. bonds outstanding, selling for $1,060 and yield to maturity 7% 000 shares of preferred stock outstanding, currently selling for $60 per share. Market: 7 percent market risk premium and 4.5 percent risk-free rate.

Explanation / Answer

Problem 1

Cost of Equity = Rf + Beta x (Rm - Rf) Cost of Equity = 4.5% + 1.15 x 7% 12.55% Cost of debt after tax = 7% x (1 -35%) 4.55% Cost of Preferred Capital = $4/$60 6.67% Sources of Capital Market Value Weights Cost of Capital WACC Debentures (8000 bonds x $1060) $8,480,000.00 25.50% 4.55% 1.16% Preferred Stock (15000 shares x $60) $900,000.00 2.71% 6.67% 0.18% Common Stock (310,000 shares x $77) $23,870,000.00 71.79% 12.55% 9.01% Total $33,250,000.00 100.00% 10.35%

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