Management would like to get the companys Marginal Cost of Capital below 8.5%. They are planning to sell $26,000,000 in bonds and use the proceeds to buy back common stock. (Assume the bonds are sold for par value, the terms/rates are the same as existing bonds, and common stock can be bought back at the current price of common stock.) This will result in a decrease of common shares outstanding (rounded to the nearest dollar) and increase in the number of bonds.

1. Will this strategy achieve managements goal?
2. What will the Marginal Cost of Capital be afterward?

\begin{tabular}{ll} \hline Price per share of Common Stock & $45 \\ \hline Price per share of Preferred Stock & $60 \\ \hline Price per Bond (\$1000 par value) & $865 \\ \hline Number of shares of Common Stock Outstanding & 2,300,000 \\ \hline Number of shares of Preferred Stock Outstanding & 500,000 \\ \hline Number of Bonds Outstanding & 60,000 \\ \hline Coupon Rate on Bonds & 5% \\ \hline Time Remaining Until Maturity for Bonds & 15 years \\ \hline Marginal Tax Rate & 25% \\ \hline Par Value of Preferred Stock & $50 \\ \hline Dividend Rate on Preferred Stock & 9% \\ \hline Common Stock Dividend (D1) & $3.00 \\ \hline Dividend Growth Rate (Common) & 6% \\ \hline Risk-Free Rate & 5% \\ \hline Beta & 1.2 \\ \hline Expected Return on the Market & 12% \\ \hline Risk Premium on Stocks over Bonds & 4.50% \\ \hline \end{tabular}