For a firm with 20% equity, and 80% debt in their capital structure, a debt cost of capital of 14% and an equity cost of capital of 11%, which corporate action would have the biggest reduction in WACC?Select an answer:a stock dividenda bond issuance (proceeds are used for general corporate purposes)a share buybacka bond redemption

The Weighted Average Cost of Capital (WACC) is calculated by multiplying the cost of each capital component by its proportional weight and then summing:

WACC = (E/V) * Re + (D/V) * Rd * (1 - Tc)

Where: Re = cost of equity Rd = cost of debt E = market value of the firm's equity D = market value of the firm's debt V = E + D = total market value of the firm's equity and debt E/V = percentage of financing that is equity D/V = percentage of financing that is debt Tc = corporate tax rate

Given the information provided, we can see that the cost of debt (14%) is higher than the cost of equity (11%). Therefore, any action that reduces the proportion of debt in the capital structure will reduce the WACC.

Let's analyze the options:

a) A stock dividend: This would increase the amount of equity, reducing the proportion of debt in the capital structure. This would reduce the WACC.

b) A bond issuance: This would increase the amount of debt, increasing the proportion of debt in the capital structure. This would increase the WACC.

c) A share buyback: This would decrease the amount of equity, increasing the proportion of debt in the capital structure. This would increase the WACC.

d) A bond redemption: This would decrease the amount of debt, reducing the proportion of debt in the capital structure. This would reduce the WACC.

Therefore, the corporate actions that would have the biggest reduction in WACC are a stock dividend and a bond redemption. However, between these two, a bond redemption would have a bigger impact because it directly reduces the amount of high-cost debt. So, the answer is d) a bond redemption.