To find the weighted average aftertax cost of debt we

This preview shows page 12 - 15 out of 41 pages.

To find the weighted average aftertax cost of debt, we need the weight of each bond as a percentage of thetotal debt. We find:wD1= 0.97($85,000,000)/$136,450,000 = 0.6043wD2= 1.08($50,000,000)/$136,450,000 = 0.3957Now we can multiply the weighted average cost of debt times one minus the tax rate to find the weightedaverage aftertax cost of debt. This gives us:RD= (1 – 0.35)[(0.6043)(0.0728) + (0.3957)(0.0637)] = 0.0450, or 4.50%Using these costs we have found and the weight of debt we calculated earlier, the WACC is:WACC = 0.8106(0.1195) + 0.1894(0.0450) = 0.1054, or 10.54%
ReferencesWorksheetLearning Objective: 14-03 Howto determine a firms overall costof capital and how to use it tovalue a company.Difficulty: BasicSection: 14.4 The WeightedAverage Cost of CapitalAssignment Print View
12 of 411/25/2017 12:05 PM
You are given the following information for Lightning Power Co. Assume the company’s tax rate is 35percent.Debt:8,000 6.5 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity,selling for 106 percent of par; the bonds make semiannual payments.Common stock:310,000 shares outstanding, selling for $57 per share; the beta is 1.05.Preferred stock:15,000 shares of 4 percent preferred stock outstanding, currently selling for $72 pershare.Market:7 percent market risk premium and 4.5 percent risk-free rate.What is the company's WACC?(Do not round intermediate calculations and round your answer to2 decimal places. (e.g., 32.16))
Assignment Print View13 of 411/25/2017 12:05 PM
ReferencesWorksheetLearning Objective: 14-03 Howto determine a firms overall costof capital and how to use it tovalue a company.Difficulty: BasicSection: 14.4 The WeightedAverage Cost of CapitalAssignment Print View14 of 411/25/2017 12:05 PM

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture