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Evenflow Power Co.: Finding the WACC

Consider the following information for Evenflow Power Co.,

Debt: 2,500 7.5 percent coupon bonds outstanding, $1,000 par value, 20 years to maturity, selling for 103 percent of par; the bonds make semiannual payments and have a YTM of 7.21%.

Common stock: 52,500 shares outstanding, selling for $61 per share; the beta is 1.06.
Preferred stock: 9,000 shares of preferred stock outstanding that pay an annual dividend of 6.5 percent, selling for $105 per share.
Market: 8.5 percent market risk premium and 6.5 percent risk-free rate.

Assume the company's tax rate is 35 percent.

Required: Find the WACC. (Do not round your intermediate calculations.)

HINT: Use the Security Market Line to get the cost of the common equity. Use the perpetuity equation to get the cost of preferred equity. Don't forget to adjust the cost of debt for taxes (and don't bother to convert the YTM into an EAR, but leave it as an APR). You will also need to calculate the market value of all three types of securities to get the capital structure weights. Now you are ready to get the WACC.


Solution Preview

First find out the total market value & weight of each asset class in the capital structure.

Debt Value = 25000*103% = 2,575,000
Common Stock = 52500*61 = 3,202,500
Preferred Stock ...

Solution Summary

The solution assists in finding the weighted average cost of capital (WACC).