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WACC

Given the following information for Bellevue Power Co., find the WACC. Assume the company's tax rate is 31%.
DEBT: 4,800 8% coupon bonds outstanding, $1,000 par value, 21 years to maturity, selling for 103% of par, the bonds make semiannual payments.
COMMON STOCK: 94,500 shares outstanding, selling for $62 per share; the beta is 1.15.
PREFERRED STOCK: 14,500 shares of 7.5% preferred stock outstanding, currently selling for $105 per share.
MARKET: 9% market risk premium and 7% risk-free rate.

Solution Preview

1. Debt:
when PMT = 8%*1000/2 = 40
FV = 1000
PV = 1000*103% = -1030
Number of periods (6 months) is n = 21*2 = 42

The formula of present value of a future value is
PV = FV/(1+r)^n
The formula of present value of an annuity is
PV = PMT*[1 - 1/(1+r)^n]/r

The PV of the bond is equal to the sum of the ...

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