9. WACC (S18-1) Nevada Hydro is 40% debt-financed and has a weighted-average cost of capital of 10.2%:

WACC = ( 1 − Tc ) r D D / V + r E E / V = ( 1−0.21 ) ( 0.085 ) ( 0.40 ) + 0.125 ( 0.60 ) = 0.102 Goldensacks Company is advising Nevada Hydro to issue $75 million of preferred stock at a dividend yield of 9%. The proceeds would be used to repurchase and retire common stock.

The preferred issue would account for 10% of the pre-issue market value of the firm.

Goldensacks argues that these transactions would reduce Nevada Hydro’s WACC to 9.84%:

W ACC = ( 1 − 0.21) ( 0.085 ) ( 0.40 ) + 0.09 ( 0.10 ) + 0.125( 0.50 )

=

0.0984, or 9.84%

Do you agree with this calculation? Explain.