Imagine you are the CFO of ABC Company. You have been successful over the years, but are now concerned about how many sources of funds you have, and the cost of those funds. With changing business conditions, you really want to keep these costs down.
The company has $200,000,000 in common stock equity with an estimated 10% annual cost of capital. You recently issued $100,000,000 in corporate bonds that currently pay a 6% annual yield. Finally, you have $100,000,000 in retained earnings with an estimated opportunity cost of 9% per year.
a. What is your weighted average cost of capital? (Calculate, and show the work)
b. What could this business do to bring this cost down? Discuss, using specific examples.
c. Why is knowing WACC important for a business?