Assume that a company has a target debt-to-equity capital structure of 2. The company currently pays 8%

Question:

Assume that a company has a target debt-to-equity of 2. The company currently pays 8% annually on its bonds. There are 10 years until maturity, and the bonds currently trade at 93% of par. Bond flotation costs are 3%. The company's beta is 1.5, the RPM = 4% and rRF = 5%. The company's tax rate = 30%.
a. Calculate the WACC.
b. Assume that the company changed its target to 47% long-term debt, 20% preferred stock, and 33% common stock. If preferreds are issued at $25, pay a of 7%, and have flotation costs of 5%, recalculate the company's WACC.
c. Briefly explain why the WACC has changed. Capital Structure
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