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

Question

Clark Communications has a capital strucutre 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?

Explanation / Answer

E/V = .7

D/V = .3

rd = 8%
rf = 5%
market risk premium = 4%
rE = rf +* market risk premium

= 5% + 1.1*4% = 9.4%

WACC = rE* E/V + rD*(1-t)*D/V

=  9.4%*.7 +8% (1-.38)*.3

= 8.068%

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