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.)

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.