Posted: March 25th, 2017

Assume the firm could issue $10 million in additional bonds, at 9 percent. Using the proceeds to retire $10 million worth of equity, what would happen to the firm’s WACC? What would happen to the required return on the company’s stock?

Assume that capital markets are perfect. A firm finances its operations with $50 million in stock, with a required return of 15 percent, and $40 million in bonds with a required return of 9 percent. Assume the firm could issue $10 million in additional bonds, at 9 percent. Using the proceeds to retire million worth of equity, what would happen to the firm’s WACC? What would happen to the required return on the company’s stock?