Suppose Fastest Company's current balance sheet showed book value weights of 31 percent debt, 10 percent preferred shares, and 59 percent common equity. Assuming its cost of debt was 3.2 percent, the cost of preferred shares was 5.6, and the cost of common equity was 8.7 pecent, estimates Fastest Company's WACC (based on these book value weights). Assume now that Fastest Company is not planning to issue preferred shares on the future, but anticipates a target capital structure of 36 percent debt and 64 percent common equity. Re-estimate Fastest Company's WACC.
The WACC in the 1st case:
In the 2nd case, the WACC is: