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Hi, can you please assist with this question c only. I have already done a and b.

a. Company x has 25,000 bonds outstanding that trade at par value (each bond has a par value of $1,000). Companies with similar characteristics have their bonds trading at a yield of 5.5%. The company also has 2 million shares of common stock outstanding. The stock has a beta of 1.2 and sells for $50 a share. The risk free rate is 2% and the market risk premium is 5%. The companys tax rate is 30%. What is the companys weighted average cost of capital? b. Company x now wishes to change its capital structure to have a weighted average cost of capital of 6.75%. What debt ratio (debt to total firm value) is needed for the firm to achieve its targeted weighted average cost of capital? c. Suggest one strategy the firm could use to implement this preferred change to the capital structure. Show your calculations for the steps needed to implement this change to match the preferred WACC in (b).

Background:

WACC went from 6.94% to 6.75% and Debt to Equity ratio went from 20:80 to 24:76.

My workings in section B to find the debt to equity ratio for a WACC of 6.75% are below.

WACC	6.75%
What debt ratio is needed to achieve this WACC?
*Note weight of Debt = x, then weight of Equity = 1-x.
WACC =	(Re*We)+(Rd*(1-T))*Wd
WACC =	is=(0.08*(1-x))+(0.0385*0.70)*x
0.0675=	is=(0.08*(1-x))+(.02695*x)
0.0675=	(0.08 - 0.08x)+0.2695x
0.0675=	0.08 - 0.05305x
is -0.05305x =	0.0675-0.08
x=	(0.0675-0.08)/-0.05305
x=	0.235626767
Wd=	0.2356
We=	0.7644
Check	100%
Check if these debt to equity ratio's equal 6.75%
WACC =	(Re*We)+(Rd*(1-T))*Wd
WACC =	6.75%
Answer	The debt to equity ratio is D=24% E=76%

Thanks for your help.

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