Question
ABBC Inc. operates a very successful chain of yogurt and coffee shops spread across the southwestern part of the United States and needs to raise
ABBC Inc. operates a very successful chain of yogurt and coffee shops spread across the southwestern part of the United States and needs to raise funds for its planned expansion into the Northwest. The firm's balance sheet at the close of 2015 appeared as follows.
At present, the firm's common stock is selling for a price equal to 3 times its book value, and the firm's investors require a return of 16 percent. The firm's bonds command a yield to maturity of 9 percent, and the firm faces a tax rate of 32 percent. At the end of the previous year, ABBC's bonds were trading near their par value.
a. What does ABBC's capital structure look like? b. What is ABBC's weighted average cost of capital? c. If ABBC's stock price were to rise such that it sold at 3.5 times its book value and the cost of equity fell to 13 percent, what would the firm's weighted average cost of capital be (assuming the cost of debt and tax rate do not change)?
a. What is the proportion of debt financing in ABBC's capital structure?
What is the proportion of equity financing in ABBC's capital structure?
b. What is ABBC's weighted average cost of capital?
c. if ABBC's stock price were to rise such that it sold at 3.5 times its book value and the cost of equity fell to 13 percent, what would the firm's weighted average cost of capital be (assuming the cost of debt and tax rate do not change)?
Data table Cash $ 2,020,000 4,190,000 Accounts receivable Inventories 1,760,000 32,519,000 Long-term debt Common equity $ 8,933,000 31,556,000 Net property, plant, and equipment $ 40,489,000 $ 40,489,000 Total assets Total debt and equityStep by Step Solution
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