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| You are given the following information for Huntington Power Co. Assume the company’s tax rate is 40 percent. |
| Debt: | 7,000 7.4 percent coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 103 percent of par; the bonds make semiannual payments. |
| Common stock: | 460,000 shares outstanding, selling for $64 per share; the beta is 1.07. |
| Market: | 7 percent market risk premium and 5.40 percent risk-free rate. |
| What is the company’s WACC? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))
Expert AnswerCost of debt = 7.4% Tax rate = 40% Therefore, after tax cost of debt = 7.4 (1-0.40) = 4.44% Cost of equity = Risk free return + Market risk premium * Beta = 5.4 + 7 * 1.07 = 12.89% Market value of debt = 7,000 debt@103% of $1,000 i.e. @1,030 = $ 7,210,000 Market value of equity = 460,000 shares @$64 = $29,440,000 Weightage of debt = 7,210,000/(7,210,000 + 29,440,000) = 0.20 Weight of equity = 1- 0.20 = 0.80 Therefore, weight average cost of capital (WACC) = 0.20*4.44 + 0.80 * 12.89 = 11.2% |
