Question

Given the following information for Lightning Power Co., find the Weighted Average Cost of Capital (WACC). Assume the company's tax rate is 21 percent.

Debt: 12,000 bonds with a 4.6 percent coupon outstanding, 1,000 par value, 25 years to maturity, selling for 105 percent of par; the bonds make semiannual payments.
Common Stock: 575,000 shares outstanding, selling for81 per share; the beta is 1.04.
Preferred Stock: 30,000 shares of 3.4 percent preferred stock outstanding, 100 par value, currently selling for94 per share.

Answer 1

The Weighted Average Cost of Capital (WACC) for Lightning Power Co. is approximately __X%__.

Step-by-step explanation:

The Weighted Average Cost of Capital (WACC) is a crucial financial metric that represents the average cost of the company's capital from various sources. To calculate WACC, we need to consider the cost of debt, cost of equity, and cost of preferred stock, weighted by their respective proportions in the capital structure.

1. Cost of Debt:

Firstly, we calculate the cost of debt, considering the given information about the bonds. The formula for the cost of debt is
`\(r_d = (C * (1 - T))/(P) + ((F - P))/(N * P)\`), where (C) is the annual coupon payment, (T) is the tax rate, (P) is the current price, (F) is the face value, and (N) is the number of years to maturity. After obtaining the cost of debt, we weigh it by the proportion of debt in the capital structure.

2. Cost of Equity:

The cost of equity is calculated using the Capital Asset Pricing Model (CAPM). The formula is
`\(r_e = r_f + \beta * (r_m - r_f)\)`, where
`\(r_f\)` is the risk-free rate,
`\(\beta\)` is the beta of the stock, and \(r_m\) is the expected market return. The cost of equity is then weighted by the proportion of equity in the capital structure.

3. Cost of Preferred Stock:

The cost of preferred stock is straightforward and is given by the dividend rate. We multiply the dividend rate by the market price per share and weigh it by the proportion of preferred stock in the capital structure.

Finally, we sum the weighted costs of debt, equity, and preferred stock to obtain the WACC. The WACC formula is
`\(WACC = w_d * r_d + w_e * r_e + w_ps * r_ps\)`, where
`\(w_d\), \(w_e\)`, and
`\(w_ps\)` are the weights of debt, equity, and preferred stock, respectively.