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You are given the following information for Huntington Power Co. Assume the company’s tax rate is...

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Finance

You are given the following information for Huntington Power Co.Assume the company’s tax rate is 23 percent.

  

  Debt:

28,000 4.7 percent coupon bonds outstanding, $2,000 par value,23 years to maturity, selling for 103 percent of par; the bondsmake semiannual payments.

  Commonstock:460,000 sharesoutstanding, selling for $74 per share; the beta is 1.08.
  Market:7 percent marketrisk premium and 3.9 percent risk-free rate.

What is the company's WACC? (Do not round intermediatecalculations and enter your answer as a percent rounded to 2decimal places, e.g., 32.16.)

Answer & Explanation Solved by verified expert
3.6 Ratings (538 Votes)

Step-1:Calculation of weight of each component of capital
Market value of:
Debt               28,000 * $             2,000 * 103% = $       5,76,80,000
Equity           4,60,000 * $                   74 = $       3,40,40,000
Total $       9,17,20,000
So, weight of:
Debt $ 5,76,80,000 / $ 9,17,20,000 =      0.6289
Equity $ 3,40,40,000 / $ 9,17,20,000 =      0.3711
Total      1.0000
Step-2:Calculation of cost of each component of capital
Before tax cost of debt = =RATE(nper,pmt,pv,fv)*2 Where,
= 4.49% nper 46
pmt $                   47.00
pv $            -2,060.00
fv $             2,000.00
After tax cost of debt = Before tax cost of debt*(1-Tax rate)
= 4.49% *(1-0.23)
= 3.46%
Cost of equity = Risk free rate + Beta *market risk premium
= 3.9%+1.08*7%
= 11.46%
Step-3:Calculation of WACC
Weight Cost Weighted Cost
a b a*b
Debt               0.6289 3.46% 2.17%
Equity               0.3711 11.46% 4.25%
WACC 6.43%
So,
WACC is 6.43%

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Transcribed Image Text

You are given the following information for Huntington Power Co.Assume the company’s tax rate is 23 percent.    Debt:28,000 4.7 percent coupon bonds outstanding, $2,000 par value,23 years to maturity, selling for 103 percent of par; the bondsmake semiannual payments.  Commonstock:460,000 sharesoutstanding, selling for $74 per share; the beta is 1.08.  Market:7 percent marketrisk premium and 3.9 percent risk-free rate.What is the company's WACC? (Do not round intermediatecalculations and enter your answer as a percent rounded to 2decimal places, e.g., 32.16.)

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