Imagine you are the CFO of IBM. You have been successful over the years, but are now concerned about how many sources of funds you have, and the cost of those funds. With changing business conditions, you really want to keep these costs down.
At IBM, you have issued $100,000,000 in Corporate Bonds that carry a 6% interest rate, $200,000,000 in Equity that offers a 10% dividend, and $100,000,000 in Retained Earnings that has an opportunity cost of 9%.
a. What is your weighted average cost of capital? (Calculate, and show the work)
b. What could this business do to bring this cost down? Discuss, using specific examples.
c. Why is knowing WACC important for a business?