Nevada Hydro is 40% debt-financed and has a weighted-average cost of capital of 9.7%: WACC = (1-T C )r D D/V +r E E/V = XXXXXXXXXX XXXXXXXXXX) = .097 Golden sacks Company is advising Nevada Hydro to...

Nevada Hydro is 40% debt-financed and has a weighted-average cost of capital of 9.7%:

WACC = (1-T_C)r_DD/V +r_EE/V

= (1 -.35) (.085) (.40) + .125 (.60) = .097

Golden sacks Company is advising Nevada Hydro to issue $75 million of preferred stock at a dividend yield of 9%. The proceeds would be used to repurchase and retire common stock. The preferred issue would account for 10% of the preissue market value of the firm.

Golden sacks argues that these transactions would reduce Nevada Hydro’s WACC to 9.4

WACC = (1-.35) (.085) (.40) + .09(.10) +.125(.50)

= .094, or 9.4%

Do you agree with this calculation? Explain.