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Lawton Lawns, Inc. wishes to reduce their leverage. They currently have 40 shares of common...

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Finance

Lawton Lawns, Inc. wishes to reduce their leverage. They currently have 40 shares of common stock outstanding, selling today at $212.42 per share. Over a relevant time period, the correlation of the returns of the stock with the returns of the market has been 0.62. The standard deviation of the stocks returns is 44.30% and the standard deviation of the markets returns is 28.91%. They have 10 bonds outstanding, each selling at $1,062.10. The bonds pay coupons of 7% and have eight years until maturity. The yield to maturity is either 5.5% or 6%. To reduce their leverage, they will issue another 20 shares of common stock, and use the proceeds to buy back bonds at todays price. You may assume that the prices of both the common stock and the bonds do not change in this transaction. The corporate tax rate is 28%. The ten-year T-bond is yielding 3.5%, and the return on the market portfolio is expected to be 13.5%. What will the WACC of Lawton Lawns be after they reduce their leverage?

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