(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

 


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This question was answered on: May 23, 2022

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