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Wilson Corporation (not real) has a targeted capital structure of 40% long term debt and 60% common stock. The debt is yielding 6% and the corporate tax rate is 35%. The common stock is trading at $50 per share and next year's dividend is $2.50 per share that is growing by 4% per year. Calculate the company's weighted average cost of capital. Use the dividend discount model. Show calculations in Microsoft® Word. The company's CEO has stated if the company increases the amount of long term debt so the capital structure will be 60% debt and 40% equity, this will lower its WACC. Explain and defend why you agree or disagree. Report how would you advise the CEO.
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****** ***********
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******** **** is *** ****** Please ***** and *** ** **** any *******
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******** average **** ** ******* **** * ** ** debt) *********** cost ** ***** ******* * ** of ****** *********** ** common ********** of equityCost of ********************** ** ************************************************************************* *** company increases *** ****** ** **** **** **** ** the ******* ********* will ** 60% debt *** 40% ******************************** ***** that ** the ******* ********* *** amount of **** ** **** be **** ** ***** its **** ** ******* **** ** because **** ********* tend ** have *** advantages **** *** ****** ********* The ******** expenses ** *** **** **** ** ** *** deductible *** this ***** ** reduce *** **** ** **** capital ** *** amount ** debt ** ********* **** from *** its ******* **** *** **** ************ **** that the **** of ******* **** ****** **** **** to **** Advice ** *** *** I ***** ****** *** CEO ** ***** ** ******* ******* ********* ** ******* *** * ********* that ****** ** ***** balance ******* ***** and equity and one **** **** ******** *** **** ** capital ** a **** *** ******* structure **** between ********** the ******* *** *** ********* burdens ***** *** things that *** CEO has ** **** ** **** **** coming up **** ** optimal ******* structure ***** ******* *** ************ ** ****** capital *** ***** ** ****** *** ***** of **** *** *** firm’s ************* The ************** **** *** CEO *** ** **** ******** the ******** ***** *** the ********* risks ****** the ***************** ***** *** ********* risks ***** **** * ******** ** not **** ** generate sufficient ******* ** cash flow If ***** is the *********** ** **** ******** *** ********* **** *** of ****** ****** ****** ** ***** ** **** a ********* If a ******** ** ********** sufficient **** ***** **** *** ******** *** decide ** *** ****** ******* ** ***** ** ******** the ******* **** *** **** ******** rates *** **** *** ********* ******** ******** ******* ******* through ***** **** ****** *** to the high ******** **** On *** ***** **** **** *** interest ***** are low the ********* ******** ******** using **** ***** *** **** ****** to **** ********* ** *** **** ***** ** ***** ***** ************** help to ******** *** capital ************ maximize *** ******* *** implement the ****** plansTaking business *** ********* ***** **** ************* **** ****** **** *** ******** **** sufficient cash ***** ** meet the capital expenditures *** ********* ************** **** ensures **** * ******** able to ******** ******* ******* ********* *** resources The ********* *** the ********** ** more **** **** ***************** more ********** ******* **** *** outside borrower ** ******* ** *********** *** ********* **** ** ******* **** the business borrows *** money it **** **** *** ********** ** make agreed payments *** business **** **** less ********* interests This **** **** ** *** bringing in a *** ** ************ **** *** outsideTax *********** **** is *** advantage **** **** **** financing **** ********** ** *** ********** *** ********** in **** ********* ******* ***** ** ******** *** cost ** ********** ******** amounts *** ******* ********** as ******** *** **** are ********* ******** from *** ******** ****** taxes(DeAngelo 1980) **** help ********* to ***** the ******* that actually ***** *** ******* requirements ** as to complete ***** ******** **** financing ** **** able to ******* *** **** until ******** Through *** debt ********* *** ******* *** ** able to ******* ******** ******* ****** ** **** ********* interests Debt ********* provide some tax ********** **** is ******* *** ***** are ****** as part of *** ***** **** help ** *** ******** and ***** *** ******** ** *** ************ *** ***** **** *** ********* are *** advantages of **** ****** ********* option(DeAngelo 1980)The ******** **** *** **** to ******* a *** ** costs ** ********* *** ***** ** addition some ********* *** ***** ******* to provide ****** ** funding ** the ******** ********* ** **** ConclusionIn **** **** ****** ******* **** *** **** of **** ** ***** ***** **** *** **** ** equity *** ** ******* ******* structure *** *** should consider ****** the ****** ** 60% **** *** ** * ****** This **** **** *** **** to raise the amount ****** *** ** *** **** **** ** maintain ** optimal ********* that will ****** into * lower **** ** *******
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