Homework Sourse9400 84 percent coupon bonds outstanding 1000 par value 21 y
9,400 8.4 percent coupon bonds outstanding, $1,000 par value, 21 years to maturity, selling for 100.5 percent of par; the bonds make semiannual payments.
12,900 shares of 5.95 percent preferred stock outstanding, currently selling for $97.10 per share.
What is the company\'s cost of each form of financing? (Do not round intermediate calculations. Enter your answers as a percentage rounded to 2 decimal places (e.g., 32.16).)
Calculate the company\'s WACC. (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)
| Information on Janicek Power Co., is shown below. Assume the company’s tax rate is 40 percent. |
Solution
Cost of debt:
Using financial calculator BA II Plus - Input details:
#
FV = Future Value =
$1,000.00
PV = Present Value =
-$1,005.00
N = Total number of periods = Years x frequency of coupon =
42
PMT = Payment = Coupon / frequency of coupon =
$47.00
CPT > I/Y = Rate or YTM =
4.6726
Convert Yield in annual and percentage form = Yield / 100*2 =
9.35%
After-tax cost of debt = YTM x (1-Tax) = Yield x (1-40%) =
5.61%
.
Cost of equity as per CAPM:
Cost of equity = Risk free rate + Beta x Market risk premium
Cost of equity = 5% + 1.24 x 7.2%
Cost of equity = 13.93%
.
Cost of preferred share = Face value x Dividend in % / Selling price of preferred
Cost of preferred share = 100 x 5.95% / 97.1
Cost of preferred share = 6.13%
------------
Each cost of financing:
Particulars
Cost
Cost of equity
13.93%
After tax cost of debt
5.61%
Cost of preferred
6.13%
WACC = Cost of equity x Weight of equity + Cost of preferred x Weight of preferred x After tax cost of debt x Weight of debt
WACC = 13.93% x 63.20% + 6.13%*4.31% + 5.61%*32.49%
WACC = 10.89%
The following table does the detail working:
Particulars
Price
Quantity
Total value
Weights
Cost
Weight x Cost
Equity
83.9
219000
18,374,100.00
63.20%
13.93%
8.802%
Debt
1005
9400
9,447,000.00
32.49%
5.61%
1.822%
Preferred
97.1
12900
1,252,590.00
4.31%
6.13%
0.264%
29,073,690.00
10.89%
| Using financial calculator BA II Plus - Input details: | # |
| FV = Future Value = | $1,000.00 |
| PV = Present Value = | -$1,005.00 |
| N = Total number of periods = Years x frequency of coupon = | 42 |
| PMT = Payment = Coupon / frequency of coupon = | $47.00 |
| CPT > I/Y = Rate or YTM = | 4.6726 |
| Convert Yield in annual and percentage form = Yield / 100*2 = | 9.35% |
| After-tax cost of debt = YTM x (1-Tax) = Yield x (1-40%) = | 5.61% |
