Task: Company X is considering changing its capital structure in light of the tough business environment. Currently, Company X’s total capital consists of:
i) $950 million in debt
ii) $500 million of preferred stock
iii) $900 million in common stock
iv) $750 million in retained earnings
v) 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.
vi) 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%.
Required:
Question1. Find the weighted average cost of capital given the data above.
Question2. If Company X wants to change its capital structure (i.e., lower it’s WACC), what should it do?
Note:
Show your calculations in detail and explain your reasoning.