Nevada Hydro is 40% debt-financed and has a weighted-average cost of capital of 9.7%: WACC = (1

Question:

Nevada Hydro is 40% debt-financed and has a weighted-average cost of capital of 9.7%:

WACC = (1 - Tc)rD D/V + rE E/V

= (1 - .35)(.085)(.40) + .125(.60) = .097

Goldensacks Company is advising Nevada Hydro to issue $75 million of preferred stock at a dividend yield of 9%. The proceeds would be used to repurchase and retire common stock. The preferred issue would account for 10% of the pre-issue market value of the firm. Goldensacks argues that these transactions would reduce Nevada Hydro's WACC to 9.4%:

WACC = (1 - .35)(.085)(.40) + .09(.10) + .125(.50)

= .094, or 9.4%

Do you agree with this calculation? Explain.

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