Impact of Capital Structure: What is the WACC? How to lower WACC? Why lower WACC?
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The common stockholders have an expected return of 12%, preferred stockholders have an expected return of 6%, and the firm's bondholders purchased the firms bonds at a yield to maturity (YTM) of 4%. The firm's tax rate is 40%.
Common stock $2,000,000
Preferred stock $3,000,000
Long-term debts (bonds) $5,000,000
Total liabilities + equity = $10,000,000
What is the WACC of the company?
If I wished to lower the WACC, what is a set of new dollar figures using different amounts of common stock? Preferred stock? And long term debt that would lower the WACC. Please show the calculations for the new capital structure with a lower WACC than the structure that the company originally had. Why would someone want to lower a companies WACC?
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The solution discusses the impact on capital structure.
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