Explore BrainMass

Explore BrainMass

    Computation of Weighted average Cost of Capital (WACC)

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Consider the following information on Huntington Power Co.

    Debt: 4,000, 7% semiannual coupon bonds outstanding, $1,000 par value, 18 years to maturity, selling for 102 percent of par; the bonds make semiannual payments.
    Preferred Stock: 10,000 outstanding with par value of $100 and a market value of 105 and $10 annual dividend.
    Common Stock: 84,000 shares outstanding, selling for $56 per share, the beta is 2.08

    The market risk premium is 5.5%, the risk free rate is 3.5% and Huntington's tax rate is 32%.
    Compute the WACC.

    © BrainMass Inc. brainmass.com October 2, 2020, 6:10 am ad1c9bdddf

    Solution Preview


    WACC = [Weight of debt * After-tax cost of debt] + [Weight of preferred stock * Cost of preferred stock] + [Weight of equity * Cost of equity]

    Step 1: To find before-tax and after-tax cost of debt
    Before-tax cost of debt is the yield to maturity (YTM) of the bond. YTM can be computed as:
    Number of semi-annual periods (18 years * 2), NPER ...

    Solution Summary

    The solution shows step by step workings for computation of WACC.