Project #11370 - financial policy & strategy

As the new chief financial officers (CFO) of Q & R Manufacturing, the chief executive officer (CEO) reminded you that you are expected to try and adjust the firm's capital structure to lower its weighted average cost of capital (WACC). He asks you to address a number of questions dealing with WACC in a report to him and the firm's board of directors.

The company's balance sheet has the following information in the liabilities and stockholder equity section:

  • The common stockholders have an expected return of 12%, preferred stockholders have an expected return of 6%, and the firm's bondholders purchased the firms bonds at a yield to maturity (YTM) of 4%. The firm's tax rate is 40%.

 

Common stock $2,000,000
Preferred stock $3,000,000
Long-term debts (bonds) $5,000,000


Total liabilities + equity = $10,000,000

 

Given the previous information, address the following requirements:

  • Calculate the firm's WACC.
  • If, as the firm's CFO, you wished to lower the WACC, make up a set of new dollar figures using different amounts of common stock, preferred stock, and long-term debt that would lower the WACC.
  • Show the calculations to demonstrate that the new capital structure has a lower WACC than the original structure.
  • Explain why you may want to lower the firm's WACC.

 

Please submit your assignment.

Subject Business
Due By (Pacific Time) 08/26/2013 11:00 pm
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