Information on lightning power, co., is shown below. assume the company’s tax rate is 21 percent.

debt: 16,000 6.2 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 108 percent of par; the bonds make semiannual payments.

common stock: 535,000 shares outstanding, selling for $81 per share; beta is 1.20.

preferred stock: 20,000 shares of 4.2 percent preferred stock outstanding, currently selling for $92 per share. the par value is $100.

market: 7 percent market risk premium and 3.1 percent risk-free rate.

calculate the company's wacc.

WACC(with preferred shares)10.60145%

Explanation:

First, we derminate the cost of debt by solving for the rate at which the present value matches the 1,080 as which the bond is currently selling:

this could be done using a financial calculator or Excel:

C62

time50

rate0.057126844

PV$1,017.8208  

Maturity   1,000.00  

time   50.00  

rate  0.057126844

PV   62.18  

PV c$1,017.8208  

PV m  $62.1792  

Total$1,080.0000  

Now, we calculate the debt:

16,000 bonds x 1,000 x 108% =  17,280,000  

Now we move to equity:

We have to determinate the cost of capital using CAMP

risk free0.031  

market rate0.09  

premium market(market rate - risk free) = 0.07

beta(non diversifiable risk)1.2  

Ke0.11500  

Now we calcualte the equity

535,000 shares x 81 = 43,335,000

Last, preferred shares:

4.2%

and then

20,000 shares x $92 = 1,840,000

Now, we are able to sovle for WACC

D  17,280,000  

E  43,335,000  

P  1,840,000  

V  62,455,000  

Ke0.115

Equity weight0.69

Kp0.042

Preferred Weight  0.03  

Kd0.1143

Debt Weight0.28

t0.21

WACC10.60145%