12% debt,9% pref shares, equity sh 100each.proportion 3:2:5.co needs further capital 14% borrowing.proposed debt,pref shares,equity is 1/10,1/15,1/16.impact of wacc.30%tax,d1 sh 9 per share,g is 5%?

To calculate the impact of the proposed capital structure on the Weighted Average Cost of Capital (WACC), we first need to calculate the current WACC using the given capital structure.

Given:
Debt = 12%
Preferred Shares = 9%
Equity = 79% (100% - 12% - 9%)

Proportion:
Debt:Preferred Shares:Equity = 3:2:5

Current WACC:
WACC = (Debt % * Cost of Debt * (1 - Tax Rate) * Proportion) + (Preferred Shares % * Cost of Preferred Shares * Proportion) + (Equity % * Cost of Equity * Proportion)

Cost of Debt = 14%
Cost of Preferred Shares = 1/15 = 6.67%
Cost of Equity = (D1 / Price) + g = (9 / 100) + 5% = 14%

WACC = (0.12 * 0.14 * (1 - 0.30) * 3/10) + (0.09 * 0.0667 * 2/10) + (0.79 * 0.14 * 5/10)
WACC = (0.00468) + (0.001194) + (0.0553)
WACC = 0.061174 or 6.12%

Now, we need to calculate the new WACC with the proposed capital structure:

Proposed Debt = 1/10 = 10%
Proposed Preferred Shares = 1/15 = 6.67%
Proposed Equity = 1/16 = 6.25%

New WACC:
WACC = (Debt % * Cost of Debt * (1 - Tax Rate) * Proportion) + (Preferred Shares % * Cost of Preferred Shares * Proportion) + (Equity % * Cost of Equity * Proportion)

WACC = (0.10 * 0.14 * (1 - 0.30) * 1/10) + (0.0667 * 0.0667 * 1/15) + (0.0625 * 0.14 * 1/16)
WACC = (0.00468) + (0.000029) + (0.000546)
WACC = 0.005255 or 0.53%

Therefore, the impact of the proposed capital structure on the WACC is a decrease from 6.12% to 0.53%. This indicates that the new capital structure is more cost-effective in terms of financing the company's operations.

Step 1: Calculate the current capital structure and weighted average cost of capital (WACC)

Current Capital Structure:
- Debt: 12%
- Preference Shares: 9%
- Equity Shares: 100 each, proportion 5

Weight of debt = 12/(12+9+5) = 0.3
Weight of preference shares = 9/(12+9+5) = 0.2
Weight of equity shares = 5/(12+9+5) = 0.5

Cost of debt

Assuming the debt is new and issued at par, the cost of debt (after tax) would be:

r_d = 14% - (1 - 30%) = 9.8%

Cost of preference shares

Given that the preference shares have a fixed dividend of 9%, the cost of preference shares is:

r_p = 9%

Cost of equity shares

Using the dividend growth model:

r_e = D1 / P0 + g
= 9 / 100 + 0.05
= 14%

WACC (before new capital)

WACC = (0.3 - 9.8%) + (0.2 - 9%) + (0.5 - 14%)
= 12.4%

Step 2: Calculate the new capital structure and WACC

Proposed New Capital Structure:
- Debt: 1/10
- Preference Shares: 1/15
- Equity Shares: 1/16

Weight of new debt = 1/10 / (1/10 + 1/15 + 1/16) = 0.42
Weight of new preference shares = 1/15 / (1/10 + 1/15 + 1/16) = 0.26
Weight of new equity shares = 1/16 / (1/10 + 1/15 + 1/16) = 0.32

New WACC

WACC (after new capital) = (0.42 - 9.8%) + (0.26 - 9%) + (0.32 - 14%)
= 11.68%

Impact on WACC

The new capital structure reduces the WACC from 12.4% to 11.68%. This is because the new debt and preference shares have lower weights than the equity shares, which have the highest cost of capital. The overall cost of capital for the company has therefore decreased.