Company stated that its optimal capital structure consists of debt taking up 30% of its total capital. B Company's existing and target capital structure is as shown. Source of Capital Target Weights Existing Weights Cost of Source Long Term Debt 30% 10% 8% Preferred Stock 15% 15% 13% Common Stock Equity 55% 75% 15% 1. Calculate the existing and target WACC of B Company 2. Would you suggest B Company to increase its long term debt to 80% and decreasing common stock equity to 5% since the cost of debt seems to be lower than equity?
Cost of Debt, Cost of Preferred Stock
This article deals with the estimation of the value of capital and its components. we'll find out how to estimate the value of debt, the value of preferred shares , and therefore the cost of common shares . we will also determine the way to compute the load of every cost of the capital component then they're going to estimate the general cost of capital. The cost of capital refers to the return rate that an organization gives to its investors. If an organization doesn’t provide enough return, economic process will decrease the costs of their stock and bonds to revive the balance. A firm’s long-run and short-run financial decisions are linked to every other by the assistance of the firm’s cost of capital.
Cost of Common Stock
Common stock is a type of security/instrument issued to Equity shareholders of the Company. These are commonly known as equity shares in India. It is also called ‘Common equity
B Company stated that its optimal capital structure consists of debt taking up 30% of its total capital. B Company's existing and target capital structure is as shown.
Source of Capital | Target Weights | Existing Weights | Cost of Source |
Long Term Debt | 30% | 10% | 8% |
15% | 15% | 13% | |
Common Stock Equity | 55% | 75% | 15% |
1. Calculate the existing and target WACC of B Company
2. Would you suggest B Company to increase its long term debt to 80% and decreasing common stock equity to 5% since the cost of debt seems to be lower than equity?
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