Coco Inc.'s capital structure consists of 80% debt and 20% common equity, its beta is 1.9, before tax cost of debt is currently at 10%, and its tax rate is 40%. However, the CFO thinks the company has too much debt, and she is considering moving to a capital structure with 35% debt and 65% equity with before tax cost of debt 3%. The risk-free rate is 5.0% and the market total return is 11%. By how much would the WACC change due to this shift in Coco’s capital structure?
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
Coco Inc.'s capital structure consists of 80% debt and 20% common equity, its beta is 1.9, before tax cost of debt is currently at 10%, and its tax rate is 40%. However, the CFO thinks the company has too much debt, and she is considering moving to a capital structure with 35% debt and 65% equity with before tax cost of debt 3%. The risk-free rate is 5.0% and the market total return is 11%. By how much would the WACC change due to this shift in Coco’s capital structure? (Please show work)
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