Computation of Weighted average Cost of Capital (WACC)
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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.
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Solution Summary
The solution shows step by step workings for computation of WACC.
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Solution:
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 ...
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