WACC Question

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Company X is considering changing its capital structure in light of the tough business environment. Currently, Company X’s total capital consists of:

  • $950 million in debt   
  • $500 million of preferred stock    
  • $900 million in common stock   
  • $750 million in retained earnings         

The debt coupon is 8% and tax rate is 40%, while the current preferred share price is $96.20 and the dividend per share is $9.

The company's common stock is trading at $25.50, its dividend payout this year is $1.15, and the growth rate of the dividend is 8.5%.              

  • Find the weighted average cost of capital given the data above.
  • If Company X wants to change its capital structure (i.e., lower its WACC), what should it do?         

Show your calculations in detail and explain your reasoning.

    • 7 years ago
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