(a)

MGMT2023 paid dividends of $10 last year. The dividends are expected to grow into perpetuity at a rate of 7%. The price of each stock is set at $60 per share.

MGMT2023's bonds which matures in 20 years sells at $1,300 and pays semiannual coupons at 12% per annum. The existing tax rate is 40%.

MGMT2023's Preferred stocks which pays dividends of $20, are priced at $200. The capital structure comprises debt, common stock and preferred stock in the ratio 3:5:2, respectively.

Determine MGMT2023's WACC. (8 marks)

(b)

If MGMT2023 were to modify its capital structure by increasing its debt in order to exactly retire its preferred stocks, what would be the MGMT2023's capital structure and the percentage change in its WACC? (7 marks)