Question

Given the following information for ABC Power Co. find the WACC Assume the company's tax rate is 30 percent. Arp 8% market risk premium and 14% market rate of return 80,000 shares outstanding, selling for 45 per share, the beta is 1.00 ,9% coupon bonds outstanding, 1000 par value, 19 years maturity, selling for 102% of par, the bonds make semiannual payments.

Answer 1

To calculate the WACC for ABC Power Co., we need to consider the different capital components, including equity and debt, and their respective weights. By plugging in the given values and formulas, we can calculate a WACC of 22.28806%.

Step-by-step explanation:

To calculate the Weighted Average Cost of Capital (WACC), we need to consider the different capital components of ABC Power Co. and their respective weights. The formula for WACC is:

WACC = (Weight of Equity) * (Cost of Equity) + (Weight of Debt) * (Cost of Debt) * (1 - Tax Rate)

Let's break down the components:

• Equity: Number of shares outstanding * market price per share = 80,000 * $45 = $3,600,000
• Debt: Market value of outstanding bonds = 9% coupon * $1,000 par value * 102% selling price = $918
• Total Capital: Equity + Debt = $3,600,000 + $918 = $3,600,918
• Weight of Equity: Equity / Total Capital = $3,600,000 / $3,600,918 = 0.9997
• Weight of Debt: Debt / Total Capital = $918 / $3,600,918 = 0.0003
• Cost of Equity: Market rate of return + (Beta * Market Risk Premium) = 14% + (1.00 * 8%) = 22%
• Cost of Debt: Yield on the bond = (Interest Payment / Bond Price) + (Capital Gain / Bond Price) = ($80 / $964) + (($1080 - $964) / $964) = 12%

Now we can substitute these values into the WACC formula:

WACC = (0.9997 * 22%) + (0.0003 * 12%) * (1 - 30%) = 22.28806%