(Solution) If Company X Wants To Change Its Capital Structure (i.e., Lower Its WACC), What Should It Do? | Snapessays.com

(Solution) If Company X wants to change its capital structure (i.e., lower its WACC), what should it do?

If Company X wants to change its capital structure (i.e., lower its WACC), what should it do?

Please answer the question based on numbers and computation attached to this question.If Company X wants to change its capital structure (i.e., lower its WACC), what

should it do?

Answer the question based on numbers and computation below:

Computation of weighted average cost of capital:-

Amt.

Weight

Debt

\$

950,000,000

30.45%

Leased assets

\$

20,000,000

0.64%

Preferred stock

\$

500,000,000

16.03%

Common stock

\$

900,000,000

28.85%

Retained earnings

\$

750,000,000

24.04%

\$

3,120,000,000

100%

WACC = (Cost of debt

*Weight of debt)+(Cost of lease

*Weight of lease)+(Cost of equity

*Weight of equity)+(Cost of preferred stock

*Weight of Preferred stock)+(Cost of retained

earnings

*Weight of retained earnings)

Cost of debt =

Coupon

rate*(1-tax

rate)

Cost of debt =

8%*(1-40%)

Cost of debt =

4.8%

Cost of equity

=

((D0*(1+g))/P

0)+g

Cost of equity

=

((1.15*(1+8.5

%))/25.50)+8.

5%

Cost of equity

= 13.39%

Cost of

retained

earnings =

Cost of equity

Cost of

Solution details:
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This question was answered on: May 23, 2022

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