Problem 12-11 Finding the WACC You are given the following information for Tara Ita Power Co. Assume the company’s tax rate is 22 percent. Debt: 10,000 7.1 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 107 percent of par; the bonds make semiannual payments. Common stock: 430,000 shares outstanding, selling for $61 per share; the beta is 1.04. Market: 10 percent market risk premium and 5.1 percent risk-free rate. What is the company's WACC?
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Problem 12-11 Finding the WACC
| You are given the following information for Tara Ita Power Co. Assume the company’s tax rate is 22 percent. |
| Debt: | 10,000 7.1 percent coupon bonds outstanding, $1,000 par value, 25 years to maturity, selling for 107 percent of par; the bonds make semiannual payments. |
| Common stock: | 430,000 shares outstanding, selling for $61 per share; the beta is 1.04. |
| Market: | 10 percent market risk premium and 5.1 percent risk-free rate. |
| What is the company's WACC? |
Capital structure refers mix of long-term debt, equity, and other securities that a company uses to finance its operations and growth. Used by companies to finance their operations, such as by issuing equity, debt and preferred stock.
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 3 images
