Question
You are given the following information for Huntington Power Co. Assume the companys tax rate is 38 percent. Debt: 9,000 7.6 percent coupon bonds outstanding,
You are given the following information for Huntington Power Co. Assume the companys tax rate is 38 percent.
| Debt: | 9,000 7.6 percent coupon bonds outstanding, $1,000 par value, 30 years to maturity, selling for 105 percent of par; the bonds make semiannual payments. |
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| Common stock: | 480,000 shares outstanding, selling for $66 per share; the beta is 1.09. |
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| Market: | 9 percent market risk premium and 5.6 percent risk-free rate. |
a.) What is the company's WACC?
b.) Under what circumstances is this WACC the correct discount factor for Huntington Power to use in evaluating new projects?
c.) What are the possible problems if the firm uses this WACC to evaluate riskier projects than their current portfolio?
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