The expected return of the firm’s contributors of capital and their respective share of the right side of the balance sheet are as follows:
- 33.3% common stock with an expected return of 15%
- 33.3% preferred shareholders with a 9% expected return
- 33.3% bondholders with a yield to maturity (YTM) of 6%
- A corporate tax rate of 40%
Given the previous information, answer the following questions:
- What is the firm’s weighted average cost of capital (WACC)?
- If the firm wished to lower its WACC, how should it change the relative mix of the 3 contributors of capital? Explain your answer.
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