Question
Superman Shale Oil has a capital structure that consists of 80 percent common stock and 20 percent long-term debt. In order to calculate Supermans weighted
Superman Shale Oil has a capital structure that consists of 80 percent common stock and 20 percent long-term debt. In order to calculate Supermans weighted average cost of capital, an analyst has accumulated the following information: The company currently has 20-year bonds outstanding with annual coupon payments of 7 percent. The bonds have a face value of $1,000 and sell for $1,100. The risk-free rate is 3 percent. The required market return is 12 percent. The beta on Superman's common stock is 1.3. 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 35 percent. Given this information, what is Superman's WACC?
A. 11.9% B. 15.3% C. 18.1% D. 13.0% E. 12.6%
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started