2.)

Use the following information:

• Debt: $78,000,000 book value outstanding. The debt is trading at 93% of book value. The yield to maturity is 8%.
• Equity: 2,800,000 shares selling at $45 per share. Assume the expected rate of return on Federateds stock is 17%.
• Taxes: Federateds marginal tax rate is T_c = 0.21.

Suppose Federated Junkyards decides to move to a more conservative debt policy. A year later, its debt ratio is down to 14.25% (D/V = 0.1425). The interest rate has dropped to 7.6%. The companys business risk, opportunity cost of capital, and tax rate have not changed. Use the three-step procedure to calculate Federateds WACC under these new assumptions. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

WEIGHTED - AVERAGE COST OF CAPITAL=_______%