Capital structure

| December 9, 2015

Company X is considering changing its capital structure in light of the tough business environment. Currently, Company X%u2019s total capital consists of:

$950 million in debt
$20 million in leased assets
$500 million of preferred stock
$900 million in common stock
$750 million in retained earnings

The debt coupon is 8% and tax rate is 40%, while the current preferred share price is $96.20 and the dividend per share is $9.

The company’s common stock is trading at $25.50, its dividend payout this year is $1.15, and the growth rate of the dividend is 8.5%.

Leases are at an average cost of 8%.

Find the weighted average cost of capital given the data above.
If Company X wants to change its capital structure (i.e., lower its WACC), what should it do?

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