Before I ask this question I just want to clarify that I am not looking for some

Question

Before I ask this question I just want to clarify that I am not looking for someone to give me any answers. I'm trying to teach myself how to do this and I would like for someone to give me ideas on how to solve the problem so I can work it on my own. I have tried looking in my text and online but I don't even know where to start. This is my homework question:

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.

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%.          

Leases are at an average cost of 8%.         

Explanation / Answer

Formulaes used

cost of debt was calculated using kd*(1-t) = 8%*(1-0.4)

Cost of preferred stock was calculated as 9/96.2

Cost of common stock usiing dividend growth model V = d*(1-g)/(ke-g) where v=25.5,g=8.5%,d=1.15

Thus WACC = 10.1%

We find that the cost of debt is minimum... So in order to lower the WACC the company can consider the option of increasing debt in its balance sheet.(keeping financial distress in mind) In other words in order to decrease the WACC the company can use more financial leverage.

Amount(mn $) cost weight cost*wt Debt 950 4.8% 30.4% 1.46% leased assets 20 8% 0.6% 0.05% prefered stock 500 9.4% 16.0% 1.50% common stock 900 13.4% 28.8% 3.86% retained earnings 750 13.40% 24.0% 3.22% Total 3120 100.0% 10.1%

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