Information on Gerken Power Co., is shown below. Assume the company’s tax rate is 40 percent. Debt: 8,900...

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Finance

Information on Gerken Power Co., is shown below. Assume thecompany’s tax rate is 40 percent.
Debt:
8,900 8.2 percent coupon bonds outstanding, $1,000 par value, 21years to maturity, selling for 103 percent of par; the bonds makesemiannual payments.

Common stock: 214,000 shares outstanding, selling for $83.40 per share; betais 1.19.

Preferred stock:
12,400 shares of 5.95 percent preferred stock outstanding,currently selling for $97.60 per share.

Market: 7.2 percent market risk premium and 5 percent risk-freerate.

What is the company's cost of each form of financing? (Donot round intermediate calculations and enter your answers as apercent rounded to 2 decimal places, e.g.,32.16.)
Cost of equity %
Aftertax cost of debt %
Cost of preferred stock %

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

WACC ___    %

Answer & Explanation Solved by verified expert

3.7 Ratings (400 Votes)

Cost of Equity As per Capital Asset Pricing Model CAPM The Cost of Equity Capital is computed by using the following equation Cost of Equity Capital Riskfree Rate Beta x Market Risk Premium 500 720 x 119 500 857 1357 AfterTax Cost of Debt The Aftertax Cost of Debt is the aftertax Yield to maturity of the Bond The Yield to maturity of YTM of the Bond is calculated See Answer

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Transcribed Image Text

Information on Gerken Power Co., is shown below. Assume thecompany’s tax rate is 40 percent.Debt:8,900 8.2 percent coupon bonds outstanding, $1,000 par value, 21years to maturity, selling for 103 percent of par; the bonds makesemiannual payments. Common stock:214,000 shares outstanding, selling for $83.40 per share; betais 1.19. Preferred stock:12,400 shares of 5.95 percent preferred stock outstanding,currently selling for $97.60 per share. Market:7.2 percent market risk premium and 5 percent risk-freerate.What is the company's cost of each form of financing? (Donot round intermediate calculations and enter your answers as apercent rounded to 2 decimal places, e.g.,32.16.)Cost of equity____%Aftertax cost of debt____%Cost of preferred stock____% Calculate the company's WACC. (Do not round intermediatecalculations and enter your answer as a percent rounded to 2decimal places, e.g., 32.16.)WACC _______ %

Debt:		8,900 8.2 percent coupon bonds outstanding, $1,000 par value, 21years to maturity, selling for 103 percent of par; the bonds makesemiannual payments.

Common stock:		214,000 shares outstanding, selling for $83.40 per share; betais 1.19.

Preferred stock:		12,400 shares of 5.95 percent preferred stock outstanding,currently selling for $97.60 per share.

Market:		7.2 percent market risk premium and 5 percent risk-freerate.


Cost of equity	____%
Aftertax cost of debt	____%
Cost of preferred stock	____%