Clark Communications Inc. (CCI) has the following capital structure, which it considers to be optimal: debt = 25% (CCI has only long-term debt), preferred stock = 15%, and common stock = 60%. CCI’s tax rate is 40%, and investors expect earnings and dividends to grow at a constant rate of 6% in the future. CCI paid a dividend of $3.70 per share last year (D0), and its stock currently sells at a price of $60 per share. Ten-year Treasury bonds yield 6%, the market risk premium is 5%, and CCI’s beta is 1.3. The following terms would apply to new security offerings.
• Preferred stock: New preferred stock could be sold to the public at a price of $100 per share, with a dividend of $9. Flotation costs of $5 per share would be incurred.
• Debt: Debt could be sold at an interest rate of 9%.
• Common stock: All new common equity will be raised internally by reinvesting earnings.
1. Compute Clark’s cost of debt.
2. Compute Clark’s cost of preferred stock.
3. Compute Clark’s cost of common stock.
4. Calculate the firm’s WACC