Reference no: EM133119412

Given the following information for Huntington Power Co., find the WACC. Assume the company's tax rate is 21 percent.

Debt:

Common stock:

Market:

17,000 4.9 percent coupon bonds outstanding, $2,000 par value, 20 years to maturity, selling for 105 percent of par; the bonds make semiannual payments. 425,000 shares outstanding, selling for $67 per share; the beta is .88. 7 percent market risk premium and 3.5 percent risk-free rate.

WACC and NPV Och, Inc., is considering a project that will result in initial aftertax cash savings of $1.85 million at the end of the first year, and these savings will grow at a rate of 3 percent per year indefinitely. The company has a target debt-equity ratio of .65, a cost of equity of 11 percent, and an aftertax cost of debt of 4.3. percent. The cost- saving proposal is somewhat riskier than the usual projects the firm undertakes; manage- ment uses the subjective approach and applies an adjustment factor of +2 percent to the cost of capital for such risky projects. Under what circumstances should the company take on the project?

Firm Valuation Schultz Industries is considering the purchase of Arras Manufacturing. Arras is currently a supplier for Schultz and the acquisition would allow Schultz to better control its material supply. The current cash flow from assets for Arras is $7.1 million. The cash flows are expected to grow at 10 percent for the next five years before leveling off to 4 percent for the indefinite future. The costs of capital for Schultz and Arras are 11 percent and 9 percent, respectively. Arras currently has 2.5 million shares of stock outstanding and $22 million in debt outstanding. What is the maximum price per share Schultz should pay for Arras?