A company specialized in housing operates with a debt/equity ratio of 0.20. Management considers it a conservative ratio that best suits the company and its shareholders. However, members of its Board have dont agree, and believe the company could reduce its cost of capital significantly by increasing its debt/equity ratio, noting that similar companies operate with a debt/equity ratio of 0.40.

explore the financial implications for the company and its shareholders of moving from the existing capital structure, to one similar to its competitors. The companys unlevered cost of equity is 12%, it can raise debt capital at a cost of 8%, and the corporate tax rate is 20%.

1. what is the companys current WACC based on Modigliani and Miller analysis with corporate taxes?
2. What is the companys WACC under the proposed capital structure? Comment on any significant changes and their financial implications.
3. What advice would you provide to the company concerning this change in capital structure?