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Target debt-to-equity capital structure

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Practice Question: Assume that a company has a target debt-to-equity capital structure of 2. The company currently pays 8% annualy on its bonds. There are 10 years until maturity, and the bonds current trade at 93% of par. Bond flotation costs are 3%. The company's beta is 1.5, the risk-free rate is 5%, and the market risk premium is 4%. The company's tax rate= 30%.

  1. Calculate WACC.
  2. Assume that the company changed its target capital structure to 47% long-term debt, 20% preferred stock, and 33% common stock. If preferreds are issued at $25, pay a dividend of 7%, and have flotation costs of 5%, recalculate the company's WACC.
  3. Briefly explain why the WACC has changed.

Reference no: EM132200347

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