Digital X is a company active in the industry of recycling. Established in $1992,$ it is still one of the oldest and biggest companies in the field, and employees have a good share of the people living in the nearby village.

A company shows the following financial information:

Tax rate $,=30\%$

Debt $,=$$$100,000,000$

Cost of debt $,=5\%$

Total equity $,=$$$238,000,000$

Cost of capital $,=10\%$

Management has always been concerned about managing the company properly, due to the heavy social impact that distress may have on the local population, as well as for the contagion to the partner companies. The company is quoted on the regulated exchange, and the share price has been stable to the current price of $$50$ in the last months. Expectations are bullish on the stock due to recent expansion and increase in the amount invested in modern recycling methods.

One of the main concerns of the managers is the riskiness of the capital of the company and how this can impact on the perception of the investors. It is therefore important in their opinion to run an analysis of the capital structure and current cost of capital.

In average, WACC for the related industry is $9\%$

On top of that, the company has current extra cash of $$2,000,000$ to be fully distributed to the shareholders. The management has to decide which payout policy to apply in the current year, dividends, or share repurchases. The company is planned to generate, starting

from the following year, an average stable amount of extra cash to be distributed to shareholders, in the order of $$3,000,000$ per year. The outstanding shares are $1,000,000.$

a$.$ Calculate the debt$-$to$-$equity ratio of the firm?

$(2$ marks$)$

b$.$ Explain three impacts of debt to equity ratio above to the management of Digital X$.$

$(9$ marks$)$

c$.$ Compute the Weighted Average Cost of Capital for Digital X$.$

$(2$ marks$)$

d$.$ One of the main concerns of the managers in Digital $x$ is the riskiness of the capital of the company and how this can impact on the perception of the investors.

Based on above calculation $($c$),$ analyse the meaning of WACC in order to help Digital $x$ facing these problems.

$(5$ marks$)$

e$.$ How the change in capital structure can support the increase in WACC? Explain.

$(6$ marks$)$