# Computation of Weighted average Cost of Capital (WACC)

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.

https://brainmass.com/business/capital-structure-and-firm-value/computation-weighted-average-cost-capital-wacc-641473

#### Solution Preview

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 ...

#### Solution Summary

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