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
Cash $1590000
Accounts Receivable $4660000
Investories $1870000
Net property, plant, eq. $ 32504000
Total Assets $40624000
Long term debt $8417000
Common Equity $32207000
Total Debt and Equity $40624000
At present, the firm's common stock is selling for a price equal to 3 times its book value, and the firms investors require a return of 19 percent. The firms bonds command a yield of maturity of 8 percent, the firm faces a tax rate of 36 percent. At the end of the previous years, ABBC s bonds were trading near their par value.
A)what is the proportion of debt financing in ABBCs capital structure? _____ % ( Round to two decimal places)
What is the proportion of equityfinancing in ABBCs capital structure? _______% ( Round to two decimal places)
B) What is ABBCs wighted average cost of capital? ______% ( Round to two decimal places)
C) if ABBc stock price were to rise such that it sold at 3.5 times its book value and the cost of equity fell to 16 percent, what would the firms weighted average cost of capital be (Assuming the cost of debt and tax rate do not change)?_____% (Round to two decimal places)
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