Clark Communications has a capital structure that consists of 70% common stock a

Question

Clark Communications 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 havny new common stock to fund capis.
-The company's tax rate is 38%.

Given this information, what is Clark's WACC?

Explanation / Answer

Calculation of cost of debt or YTM
Price = $1,075
Annual payment = 8% *1000 = 80

$1,075 = 80/(1+YTM) + 80/(1+YTM)^2 + 80/(1+YTM)^3.....1080/(1+YTM)^15
YTM = 7.16%

Calculation of cost of equity
Re = Rf + *market risk premium

     = 5% + 1.1*4% = 9.4%

WACC = Re*E/V + Rd*D/V*(1-t)

          = 9.4%*70% + 7.16%*30%*(1-38%)

          =7.91%

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