You are given the following information for Huntington Power Co. Assume the company’s tax rate is 30 percent. Debt: 6,000 7.9 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: 510,000 shares outstanding, selling for $69 per share; the beta is 1.12. Market: 10 percent market risk premium and 5.9 percent risk-free rate. What is the company's WACC?

the company's WACC is 16.88%

Explanation:

Cost of Common Stock is Calculated as follows :

The available data allows us to use the (Capital Asset Pricing Model ) CAPM to calculate the cost of equity.

Cost of Common Stock = Risk free rate + Company`s Beta × Risk Premium

                                       = 5.9 % + 1.12× 10 %

                                       = 17.10%

Cost of Bonds is Calculated as follows :

Cost of Debt = Interest × (1- tax rate)

                     = 7.90% × ( 1- 0.30)

                     = 5.53%

Capital Source            Market Value        Weight         Cost          Total

Common Stock            $35,190,000         98.05%       17.10%      16.77%

Bonds                               $699,840            1.95%        5.53%       0.11%

Total                              $35,889,840        100.00%                      16.88%

WACC is 15.23%

Explanation:

WACC = E/V *Ke+ D/V *Kd (1- tc)

Value of a company is given sum od debt and equity

Debt 6000 bonds selling at 108 % par

     = 6000 *1000*108% = $6 480 000

Equity 510000 shares selling at $69

          510000*69 =$35 190 000

Value = 6480000+35190000 =$41 670 000

Cost of equity use CAPM

Ke =5.9%+ 1.12(10%)

      =17.1%

Cost of debt will be calculated as the YTM since our debt comprise of bonds only

C= 7.9%*1000÷2 = $39.5

n = 25*2= 50, F = 1000, P = 1000*108%=$1080

Kd = 7.9%

WACC =35190000/41670000 *17.1%+6480000/41670000*7.9%*(1-0.3)

            =0.8445*17.1% +0.1555*7.9%*0.7

             =0.1444 +0.0085

              =0.1523/15.23%

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