Evans Technology has the following capital structure.
*Debt-40%
*Common Equity- 60
The aftertax cost of debt it 6%, and the cost of common equity (in the form of retained earnings) is 13%.
A) What is the firms weighted average cost of capital?
B. An outside consultant has suggested that because debt it cheaper than equity, the firm should switch to a capital structure that is 50% debt and 50% equity. Under this new and more debt oriented arrangement, the aftertax cost of debt is 7%, and the cost of common equity (in the form of retained earnings) is 15%. Recalcualte the firms weighted average cost of capital.
C. Which plan is optimal in terms of minimizing the weighted average cost of capital?