Please show computations.
The CFO has asked you to recompute the ABC's weighted average cost of capital based upon three different financing scenarios. Tax rate of 40%.
Current financial structure is $4,500,000 debt at an average interest rate of 8.5% and common equity of $2,500,000 with a required return of 16%.
Scenario 1 is to add $1,500,000 of debt that will cost 12%.
Scenario 2 is to add $1,000,000 of debt at 10.25% and $500,000 of equity at 16%.
Scenario 3 is to add $500,000 of debt at 9%, $500,000 of preferred stock that will return 12% and $500,000 of equity to return 16%.
There are no floatation costs.