Reference no: EM132728190

Question - Sincro Ltd's capital structure is as follows:

Debt 35%

Preference Shares 15%

Ordinary Share Capital 50%

The after-tax cost of debt is 6.5%; the cost of preference shares is 10%, and the cost of ordinary share equity is 13.5%. As an alternative to the existing capital structure for Sincro, an outside consultant has suggested the following modifications:

Debt 60%

Preference Shares 5%

Ordinary Share Capital 35%

Under this new and more debt-oriented arrangement, the before-tax cost of debt is 8.5%; the cost of preference shares is 11%, and the cost of equity is 15.6%.

1. Calculate Sincro's existing weighted average cost of capital (WACC).

2. Recalculate Sincro's weighted average cost of capital (WACC), using the capital structure suggested by the outside consultant.