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Viza Longstry Communications Incorporated (VCI ) has the following capital structure, which it considers to be optimal:
Debt 40%
Common stock 60
Total capital 100%
VCI's tax rate is 40 percent, and investors expect earnings and dividends to grow at a constant rate of 9 percent in the future. VCI paid a dividend of $3.60 per share last year. The current share price is $ 50. Debt could be sold at an interest rate of 12 percent.
Required:
(a) Find the weighted average cost of capital for VCI.
(b) What would happen to the level of WACC if the company issues additional bonds at market interest rate of 10%, with tax rate and the cost of equity remaining the same? Don't calculate, and give brief explanation.
(c) What would happen to the WACC if the floatation cost is to be incorporated? Explain very briefly.
(d) Would additional debt lead to higher cost of equity for VCI? Explain in less than 6 lines.
(e) Why VCI is considering the existing debt structure as being optimal? Explain in less than 6 lines.
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