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Weighted Average Cost of Capital (WACC)

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Clark Communications has a capital structure that consists of 70 percent common stock and 30 percent long-term debt. In order to calculate Clark's weighted average cost of capital (WACC), an analyst has accumulated the following information:

? The company currently has 15-year bonds outstanding with annual coupon payments of 8 percent. The bonds have a face value of $1,000 and sell for $1,075.
? The risk-free rate is 5 percent.
? The market risk premium is 4 percent.
? 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 percent.

Given this information, what is Clark's WACC?

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Solution Summary

The solution computes weighted average cost of capital for Clark Communications.

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Formula

WACC = E/V * y + D/V * d * (1- Tr)

Where E = Market Value Equity; D = ...

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