Finance question – changing the capital structure
Company X is considering changing its capital structure in light of the tough business environment. Currently, Company X’s total capital consists of:
- $950 million in debt
- $20 million in leased assets
- $500 million of preferred stock
- $900 million in common stock
- $750 million in retained earnings
The debt coupon is 8% and tax rate is 40%, while the current preferred share price is $96.20 and the dividend per share is $9.
The company’s common stock is trading at $25.50, its dividend payout this year is $1.15, and the growth rate of the dividend is 8.5%.
Leases are at an average cost of 8%.
- Find the weighted average cost of capital given the data above.
- If Company X wants to change its capital structure (i.e., lower its WACC), what should it do?
Show your calculations in detail and explain your reasoning.