Problem 14-15 Finding the WACC [LO3] You are given the following information for Watson Power Co. Assume the company’s tax rate is 21 percent. Debt: 16,000 6.5 percent coupon bonds outstanding, $1,000 par value, 27 years to maturity, selling for 105 percent of par; the bonds make semiannual payments. Common stock:490,000 shares outstanding, selling for $67 per share; the beta is 1.18. Preferred stock: 21,500 shares of 4.3 percent preferred stock outstanding, currently selling for $88 per share. The par value is $100 per share. Market:6 percent market risk premium and 5.4 percent risk-free rate. What is the company's WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e. g., 32.16.)

The company's WACC is 9.71%.

Explanation:

Note: See the attached excel file for the computation of company's Weighted Average Cost of Capital (WACC).

The weighted average cost of capital (WACC) can be described as the rate that is expected to be paid on average by a company to all holders of its securities to finance the assets of the company.

The following formula are used in the excel file to compute the WACC of the company.

Cost of debt = Type this function that is used in the excel sheet “=Rate(Number of years * 2,((Coupon rate/2)*Par value),-Selling price),Par value)*2*(1 -  Tax rate)”. That is, type “=RATE(27*2,((6.5%/2)*1000),-1080,1000)*2*(1-21%)” in the excel file and press enter. This gives 4.83420280657156%

Note: Make sure you note all the commas and signs in the cost of debt function.

Cost of Common stock/equity using CAMP = Risk-free rate + (Beta * Market risk premium) = 5.4% + (1.18 * 6%) = 12.48%

Cost of preferred stock = (Par value * Dividend rate) / Current price = ($100 * 4.3%) / 88 = 0.0488636363636364’ or 4.88636363636364%

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