question archive Q#2) Given the following information for Magrath Power Co
Q#2) Given the following information for Magrath Power Co
Subject:FinancePrice: Bought3
Q#2) Given the following information for Magrath Power Co., find the WACC. Assume the company's tax rate is 35 percent.
Debt: 10,000 with 6.4%coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 108 percent of par; the bonds make semiannual payments.
Common stock: 495,000 shares outstanding, selling for $63 per share; the beta is 1.15.
Preferred stock: 35,000 shares of 3.5% preferred stock outstanding, currently selling for $72 per share. Market: 7% market risk premium and 3.2 percent risk-free rate.
Ans:
FV = -1,000
PV = 1,080
N = 25*2 = 50
Pmt = 1000*6.4%/2=32
CPT I/Y= ? 3.2614%
Pre-tax cost of debt = 2.119%
After tax cost of debt:1.376%
Preferred Shares: 3.5% / 72 = 4.8611
Equity Cost CAPM: beta = 1.15, Rf = 3.2%, market risk premium = 7%
Cost of Equity = 11.25%
Market value
Weight Cost
W/A
Debt
$10,800,000
0.2427 2.119%
0.0051
Common
31,185,000
0.0566 4.86%
0.0028
Preference
2,520,000
0.7007 11.25%
0.0788
44,505,000
WACC 8.67%
Q#2) Given the following information for Magrath Power Co., find the WACC. Assume the company's tax rate is 35 percent.
Debt: 10,000 with 6.4%coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 108 percent of par; the bonds make semiannual payments.
Common stock: 495,000 shares outstanding, selling for $63 per share; the beta is 1.15.
Preferred stock: 35,000 shares of 3.5% preferred stock outstanding, currently selling for $72 per share. Market: 7% market risk premium and 3.2 percent risk-free rate.
Ans:
FV = -1,000
PV = 1,080
N = 25*2 = 50
Pmt = 1000*6.4%/2=32
CPT I/Y= ? 3.2614%
Pre-tax cost of debt = 2.119%
After tax cost of debt:1.376%
Preferred Shares: 3.5% / 72 = 4.8611
Equity Cost CAPM: beta = 1.15, Rf = 3.2%, market risk premium = 7%
Cost of Equity = 11.25%
|
|
Market value |
Weight Cost |
W/A |
|
Debt |
$10,800,000 |
0.2427 2.119% |
0.0051 |
|
Common |
31,185,000 |
0.0566 4.86% |
0.0028 |
|
Preference |
2,520,000 |
0.7007 11.25% |
0.0788 |
|
|
44,505,000 |
|
WACC 8.67% |
