Reference no: EM131563395

Compare the cost of capital using three different capital structuring options:

o Option 1: Stay with the current capital structure

o Option 2: Issue new stock to repurchase its outstanding debt (reduce current D/E ratio by 1% and the pre-tax cost of debt by 0.1%)

o Option 3: Issue new debt and repurchase stock (Increase current D/E ratio by 2% and its pre-tax cost of debt by 0.2%)

- decide which option will be of the best interest for the company and its shareholders

For option 1:

Examining FPH’s WACC can be done by looking at the cost of debt (2.7%), cost of equity (8.9%), and the amount of debt ($225,134,000), amount of equity (541,669,000) with the corporate tax at 28% (FPH, 2016). This concluded the WACC for FPH to be 6.86%.

For Option 2:

the new WACC under the option of issuing new stock to repurchase current outstanding debt will be 6.7%

For option 3:

By increasing the debt to equity ratio by 2% and the pre-tax cost of debt by 0.2%. The new WACC by increasing the debt/equity ratio and pre-tax cost of debt by will be 7.29%.

My question, is lower Wacc better? if it is how will i write an anlysis for choosing the option 1 as the best practise of capital structure.