WACC Question

Company X is considering changing its capital structure in light of the tough business environment. Currently, Company X’s total capital consists of:

• $950 million in debt   
• $500 million of preferred stock    
• $900 million in common stock   
• $750 million in retained earnings         

The debt coupon is 8% and tax rate is 40%, while the current preferred share price is $96.20 and the dividend per share is $9.

The company’s common stock is trading at $25.50, its dividend payout this year is $1.15, and the growth rate of the dividend is 8.5%.              

• Find the weighted average cost of capital given the data above.
• If Company X wants to change its capital structure (i.e., lower its WACC), what should it do?         

Show your calculations in detail and explain your reasoning.