A firm is planning to change its capital structure. Its current capital structure consists of 65% common equity, 25% debt, and 10% preferred stock. The pre-tax cost of debt is 4%, cost of preferred stock is 6% and cost of common equity is 18%. The firm's tax rate is 40%. 

What is the change in its WACC (indicate an increase or a decrease in WACC) if this firms plan to adopt a new capital structure with 60% common equity, 15% debt, and 25% preferred stock if the costs for these components are 3% after-tax cost of debt, 8% cost of preferred stock, and 15% cost of common equity?

Answer rating: 100% (QA)

To calculate the change in the firms Weighted Average Cost of Capital WACC when adopting the new cap... View the full answer