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Clark company has a capital structure that consists of 70% common stock and 30% long-term debt....

Question:

Clark company has a capital structure that consists of 70% common stock and 30% long-term debt. In order to calculate Clark's WACC, an analyst has accumulated the following information:

- The company currently has 15-year, 8% annual coupon bonds that have a face value of $1,000 and sell for $1,075.

- The risk-free rate is 5%.

- The market risk premium is 4%.

- The beta on Clark's common stock is 1.1.

- The company's retained earnings are sufficient so that they do not have to issue any new common stock to fund capital projects.

- The company's tax rate is 38%.

Given this information, what is Clark's WACC?

Weighted Average Cost of Capital (WACC)

The weighted average cost of capital (WACC) represents the average rate that the firm is paying to its creditors who have financed its assets. It reflects both funds that were borrowed and funds that were raised through issuing equity.

Answer and Explanation:

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Clarks WACC is 7.92%

Calculation for cost of equity (Ke) using the Capital Assets Pricing Model:

{eq}\begin{align*} Rm &= Rf + {\rm\text{Market...

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Capital Structure & the Cost of Capital

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Chapter 15 / Lesson 1
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