Reference no: EM132725920

Question - Sincro Ltd is assessed at 30% tax rate and has the following capital structure.

Debt 40%

Preference Shares 15%

Ordinary Share Capital 45%

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, a consultant suggest 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 8.80%; the cost of preference shares is 11%, and the cost of equity is 15.60%.

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

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