P$9-23$ Calculation of individual costs and WACC Xia Trading Limited is based in Beijing,

China. The firm is interested in measuring its overall cost of capital. A current inves$-$

tigation has gathered the following data. The firm is in the $25\%$ tax bracket.

Debt The firm can raise debt by selling CNY $1,000-$par$-$value, $6\%$ coupon inter$-$

est rate, $22-$year bonds on which annual interest payments will be made. To sell

the issue, an average discount of CNY $20$ per bond would have to be given. The

firm also must pay flotation costs of CNY $25$ per bond.

Preferred stock The firm can sell Type A $8\%$ preferred stock at its CNY $100-$per$-$

share par value. The cost of issuing and selling the preferred stock is expected to

be CNY $4$ per share. Preferred stock can be sold under these terms.

Common stock The firm's common stock is currently selling for CNY $50$ per

share. The firm expects to pay cash dividends of CNY $4$ per share next year. The

firm's dividends have been growing at an annual rate of $5\%,$ and this growth is

expected to continue into the future. The stock must be underpriced by CNY $3$

per share, and flotation costs are expected to amount to CNY $2$ per share. The

firm can sell new common stock under these terms.

a$.$ Calculate the cost of after$-$tax debt.

b$.$ Calculate the cost of preferred stock.

c$.$ Calculate the cost of common stock.

d$.$ Calculate the firm's WACC using the capital structure weights shown in the

following table. $($Round answer to the nearest $0\mathrm{.}1\%.)$

P$9-24$ Weighted average cost of capital $($WACC$)$ Tack Laser Ltd$.,$ a high$-$end medical equip$-$

ment manufacturer, is trying to decide whecher to revise its target capital structure.

Currently, it targets a structure with $40\%$ debt, but it is considering a target capital struc$-$

ture with $60\%$ debt. Tack Laser currently has an $8\%$ after$-$tax cost of debt and a $14\%$

cost of common stock. The company does not have any other stock or debt outstanding.

a$.$ What is Tack Laser's current WACC?

b$.$ Assuming that its cost of debt and equity remain unchanged, what will be Laser

Tack's WACC under the revised target capital structure?

c$.$ Do you think that shareholders are affected by the increase in debt to $60\%?$ If so$,$

how are they affected? Are their common stock claims riskier now?

d$.$ Suppose that in response to the increase in debt, Tack Laser's shareholders in$-$

crease their required return so that the cost of common equity is $18\%.$ What will

its new WACC be in this case? Is it still advisable for management to revise the

target capital structure?

e$.$ Based on your answers to parts a to d$,$ explain the tradeoff between financing

with debt versus equity.