Fact situation: You are the new CFO of Random Facts, Inc. One of your projects is to develop a new financing structure for the company. You begin by analyzing the Weighted Average Cost of Capital for the company. You assemble the following information relating to the company finances.

• The company has an effective tax rate of 35%
• The company has no long-term debt. You believe, after talking to analysts, that the company can issue 20-year bonds at a rate of 8%
• The company has a short-term debt rate of 10%
• The company has no preferred stock
• The following information applies to the common stock of the company:
  • The estimated historical risk premium for the stock is 5%, according to experts
  • The forward looking premium for the companys stock is 4.5% (after calculations)
  • The risk-free premium on Treasury Bonds is 3.5%
  • The companys beta (it is not traded on an exchange) is estimated to be 1.25
  • The market risk premium is estimated at 6%
  • You decide to use the higher of: the companys estimated historical risk premium or the forward looking premium to calculate the cost of equity

Required:

• Calculate the companys WACC
• Once you have calculated the companys WACC, you decide to calculate the relative weights of each item. You determine the following:
  • Long term debt: 25%
  • Short term debt: 10%
  • Common Stock: 65%
• Calculate the adjusted WACC based on the percentages specified above