Reference no: EM133030741

QUESTION - You have been asked to estimate the weighted average cost of capital (WACC) for Boost Media Inc., a large electronic products company. To assist with your calculations, you have been provided with the following information.

1. Bonds -- Boost Media has 25,000 of $1000 face value bonds outstanding. The bonds carry a 6% coupon rate with interest paid semi-annually. Bonds are currently trading at 86.58. They are priced to provide a yield to maturity of 8%. The bonds have 10 years remaining until maturity.

2. Preferred shares -- Boost Media has 2 million preferred shares outstanding. The shares carry a stated dividend of $2.00 per share and have a current market price of $22 per share.

3. Common shares -- Boost Media has 2.5 million common shares outstanding. The current market price of the shares is $53.20 each. The shares paid a dividend of $2.70 per share last year and investment analysts believe the dividends should grow at an average annual rate of 5% for the foreseeable future.

REQUIRED -

a) Calculate Boost Media's weighted average cost of capital (WACC), assuming that the company intends to issue new common shares. The company's tax rate is 40%.

b) If a firm changes its mix of debt and equity financing, its weighted average cost of capital will change for 2 main reasons. Identify these 2 reasons, and briefly explain why the firm's WACC will change.