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Question - Sustainable ABC Company is a publicly traded waste disposal company, is a highly leveraged company with 70% debt, 0% preferred equity, and 30% common equity financing. Currently the risk-free rate is about 4.5% and the return on the ASX 200 (the market proxy) is 12.7%. The company's beta is currently estimated to be 1.65.
Required -
a. What is Fournier's current cost of equity?
b. If the company shifts its capital structure to a highly levered position by selling preferred shares and using the proceeds to retire debt, it expects its beta to drop to 1.20. What is its cost of equity in this case?
c. If the company shifts its capital structure to a less highly leveraged position by selling additional ordinary shares and using the proceeds to retire debt, it expects its beta to drop to 0.95. What is its cost of equity in this case?
d. Discuss the potential impact of the two strategies discussed in parts (b) and (c) above on Fournier's weighted-average cost of capital (WACC).
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