Business Scenario: Innovative Company (fictional) has a targeted capital structure of 40% long-term debt and 60% common stock. The debt is yielding 6% and the corporate tax rate is 35%. The common stock is trading at $50 per share and next year’s dividend is $2.50 per share that is growing by 4% per year.
Assignment Requirements: Write a minimum 900 word analysis that includes the following:
a. Calculate the firm’s weighted average cost of capital (WACC). Use the dividend discount model. Show calculations in Microsoft Word.
b. The firm’s CEO has stated if the company increases the amount of long-term debt so the capital structure will be 60% debt and 40% equity. This CEO further asserts that this strategy will lower its WACC. Explain and defend why you agree or disagree. Give an explanation of how you would advise the CEO.
c. Cite any works that you used in APA format. (If you prefer, MLA format would be fine as well.)
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