Question

You are given the following information for Lightning Power Co. Assume the company's tax rate is 35 percent.

Answer 1

Answer:

The company's WACC is 9.14%

Explanation:

cost of preferred stock

= (dividend on preferred stock)/(current market price)

= [$100*4%]/$72

= 5.56%

total finance = debt + equity + preferred stock

                     = (8,000*$1,060) + (310,000*$57) + (15,000*$72)

                     = $8,480,000 + $17,670,000 + $1,080,000

                      = $27,230,000

weight of debt = debt/total finance

                         = $8,480,000/$27,230,000

                         = 0.31

weight on equity = equity/total finace

                             = $1.080.000/$27,230,000

                             = 0.04

WACC

= (weight of debt*after tax cost of debt) + (weight on equity*cost of equity)

= (0.31*0.0393) + (0.65-0.1185) + (0.04*0.0556)

= 9.14%

Therefore, The company's WACC is 9.14%