1. Allison Engines Corporation has established a target capital structure of 40% debt and 60% common equity. The current market price of the firm's stock is P0 = $36; its last dividend was D0 = $2.80, and its expected dividend growth rate is 8%. Allison must issue new common stock at a flotation cost of 10%. Tax rate is 40%.
Find: 1. What is Allison's cost of new outside equity capital, i.e., cost of new equity?
2. Given a cost of new debt of 8%, find Allison's WACC.
hint: use constant growth formula to find Rs
2.
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 a 30-year bond issue outstanding, 15-years old, 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? (hints: find bond's YTM; use CAPM for stock return)
1. Allison Engines Corporation has established a target capital structure of 40% debt and 60% common equity. The current market price of the firm's stock is P0 = $36; its last dividend was D0 = $2.80, and its expected dividend growth rate is 8%. Allison must issue new common stock at a flotation cost of 10%. Tax rate is 40%.
Find: 1. What is Allison's cost of new outside equity capital, i.e., cost of new equity?
2. Given a cost of new debt of 8%, find Allison's WACC.
hint: use constant growth formula to find Rs
2.
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 a 30-year bond issue outstanding, 15-years old, 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? (hints: find bond's YTM; use CAPM for stock return)
