Company Overview: XYZ Inc. is a mid$-$sized manufacturing company operating in the consumer electronics sector. Over the past few years, the company has been expanding its product line and increasing market share. However, management has noticed that the current capital structure could be optimized to reduce the overall cost of capital, thereby improving profitability and financial flexibility.

Current Capital Structure: XYZ Inc. currently finances its operations through a mix of equity and debt. The capital structure consists of $60\%$ equity and $40\%$ debt. The cost of equity is estimated at $12\%,$ while the cost of debt, after tax, stands at $5\%.$

Objective: To restructure the capital in a way that minimizes the weighted average cost of capital $($WACC$),$ thereby reducing overall financing costs and improving financial performance.

Strategies Considered:

Increasing Debt Component:

Scenario A: XYZ Inc. considers increasing its debt$-$to$-$equity ratio to $50\%$ equity and $50\%$ debt. By doing so$,$ the overall cost of capital could potentially decrease due to the tax shield effect of interest payments on debt. Calculate the new weighted average cost of capital $($WACC$)$

Scenario B: XYZ Inc. considers increasing its debt$-$to$-$equity ratio to $20\%$ equity and $80\%$ debt. By doing so$,$ the overall cost of capital could potentially decrease due to the tax shield effect of interest payments on debt. Calculate the new weighted average cost of capital $($WACC$)$

Optimizing Debt Structure:

Scenario C: XYZ Inc. reviews its current debt structure to explore refinancing options or negotiating lower interest rates with lenders. Explain refinancing and how the company can benefit using this approach.

Financial Impact: If XYZ Inc. manages to refinance existing debt at a lower interest rate, say $3\%$ instead of $5\%,$ what will be the revised WACC?

Balancing Risk and Leverage:

Scenario C: The company carefully assesses the trade$-$offs between risk and leverage. What is the impact of higher debt on financial risk and interest payment obligations?