You have been asked to calculate the company's weighted average cost ofcapital (WACC), based on the following information. Over the past five yearsthe firm's stock price and earnings have both grown at approximately 5percent a year. Clear recently paid a dividend of $1.25 a share on earningsper share of $2.50 and the common shares trade at $45 per share with250,000 shares outstanding. There are no preferred shares. You check theBank of Canada's web page and the current 91-day T-bill yield is 1.25 percentand the long Canada bond yield is 2.5 percent. On your desk is a series ofreports by major investment banks that indicate a long-run return on theCanadian equity market of 8 percent to 9 percent a year, and a note thatClear's stock beta has been about 0.90. Clear also has 25-year bondsoutstanding with a $1,000 face value, 6.5 percent semi-annual coupon, and20 years to maturity. The bonds currently trade at 115. The initial bond
offering raised $15,500,000 and sold at par. The firm's marginal tax rate is 30percent.

Calculate:

The cost of equity and debt.
Calculate Clear's cost of equity using the constant growth model approach and the CAPM approach. Take the arithmetic average of thetwo results.
Determine Clear's after-tax cost of debt

Answer rating: 100% (QA)

To calculate the weighted average cost of capital WACC we first need to determine the cost of equity and the aftertax cost of debt Lets start with the ... View the full answer