Question

Information on Lightning Power, Co., is shown below. Assume the company’s tax rate is 21 percent.

Answer 1

Answer:

WACC(with preferred shares) 10.60145%

Explanation:

First, we derminate the cost of debt by solving for the rate at which the present value matches the 1,080 as which the bond is currently selling:

this could be done using a financial calculator or Excel:

$C \times \frac{1-(1+r)^{-time} }{rate} = PV$  

C 62

time 50

rate 0.057126844

$62 \times \frac{1-(1+0.0571268435271283)^{-50} }{0.0571268435271283} = PV$  

PV $1,017.8208  

 

$\frac{Maturity}{(1 + rate)^{time} } = PV$  

Maturity   1,000.00  

time   50.00  

rate  0.057126844

$\frac{1000}{(1 + 0.0571268435271283)^{50} } = PV$  

PV   62.18  

 

PV c $1,017.8208  

PV m  $62.1792  

Total $1,080.0000  

Now, we calculate the debt:

16,000 bonds x 1,000 x 108% =  17,280,000  

Now we move to equity:

We have to determinate the cost of capital using CAMP

$Ke= r_f + \beta (r_m-r_f)$  

risk free 0.031  

market rate 0.09  

premium market (market rate - risk free) = 0.07

beta(non diversifiable risk) 1.2  

 

$Ke= 0.031 + 1.2 (0.07)$  

Ke 0.11500  

Now we calcualte the equity

535,000 shares x 81 = 43,335,000

Last, preferred shares:

4.2%

and then

20,000 shares x $92 = 1,840,000

Now, we are able to sovle for WACC

$WACC = K_e(\frac{E}{E+P+D}) + K_p(\frac{P}{E+P+D}) + K_d(1-t)(\frac{D}{E+P+D})$  

D  17,280,000  

E  43,335,000  

P  1,840,000  

V  62,455,000  

Ke 0.115

Equity weight 0.69

Kp 0.042

Preferred Weight  0.03  

Kd 0.1143

Debt Weight 0.28

t 0.21

$WACC = 0.115(0.693859578896806) + 0.042(0.0294612120726923) + 0.1143(1-0.21)(0.276679209030502)$  

WACC 10.60145%