Question

Market Price	​$30	​$110	​$955
Outstanding units	1120,000	10,000	6,000
Book value	3,000,000	​1,000,000	​6,000,000
Cost of capital	15.00​%	12.00​%	9.0​%

 Clark​ Explorers, Inc., an engineering​ firm, has the following capital​ structure:  

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. Using market value and book value​ (separately, of​ course), find the adjusted WACC for Clark Explorers at the following tax​ rates:a.  

35%

b.  

25%

c.  

15​%

d.  

5​%

a.  What is the market value adjusted WACC for Clark Explorers at a tax rate of

35%?

nothing​%

​ (Round to two decimal​ places.)

Answer 1

(a) Market value and book value Adjusted WACC at a tax rate of 35%

		Using book value weights	Using market value weights
Type	Cost of capital (net of tax) (A)	Book value	Weights (B)	Weighted average cost of capital (A) * (B)	Market value	Weights (C)	Weighted average cost of capital (A) * (C)
Equity	15%	3,000,000	0.30	4.50%	3,600,000	0.35	5.18%
Preferred stock	12%	1,000,000	0.10	1.20%	1,100,000	0.11	1.27%
Debt	5.85%	6,000,000	0.60	3.51%	5,730,000	0.55	3.21%
		10,000,000		9.21%	10,430,000		9.66%

(b) Market value and book value Adjusted WACC at a tax rate of 25%

		Using book value weights	Using market value weights
Type	Cost of capital (net of tax) (A)	Book value	Weights (B)	Weighted average cost of capital (A) * (B)	Market value	Weights (C)	Weighted average cost of capital (A) * (C)
Equity	15%	3,000,000	0.30	4.50%	3,600,000	0.35	5.18%
Preferred stock	12%	1,000,000	0.10	1.20%	1,100,000	0.11	1.27%
Debt	6.75%	6,000,000	0.60	4.05%	5,730,000	0.55	3.71%
		10,000,000		9.75%	10,430,000		10.15%

(c) Market value and book value Adjusted WACC at a tax rate of 15%

		Using book value weights	Using market value weights
Type	Cost of capital (net of tax) (A)	Book value	Weights (B)	Weighted average cost of capital (A) * (B)	Market value	Weights (C)	Weighted average cost of capital (A) * (C)
Equity	15%	3,000,000	0.30	4.50%	3,600,000	0.35	5.18%
Preferred stock	12%	1,000,000	0.10	1.20%	1,100,000	0.11	1.27%
Debt	7.65%	6,000,000	0.60	4.59%	5,730,000	0.55	4.20%
		10,000,000		10.29%	10,430,000		10.65%

(d) Market value and book value Adjusted WACC at a tax rate of 5%

		Using book value weights	Using market value weights
Type	Cost of capital (net of tax) (A)	Book value	Weights (B)	Weighted average cost of capital (A) * (B)	Market value	Weights (C)	Weighted average cost of capital (A) * (C)
Equity	15%	3,000,000	0.30	4.50%	3,600,000	0.35	5.18%
Preferred stock	12%	1,000,000	0.10	1.20%	1,100,000	0.11	1.27%
Debt	8.55%	6,000,000	0.60	5.13%	5,730,000	0.55	4.70%
		10,000,000		10.83%	10,430,000		11.14%