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. Thefirm's balance sheet at the close of 2015 appeared asfollows: LOADING...
.
Atpresent, thefirm's common stock is selling for a price equal to 3 times its bookvalue, and thefirm's investors require a return of 15
15 percent. Thefirm's bonds command a yield to maturity of 8
8 percent, and the firm faces a tax rate of 35
35 percent. At the end of the previousyear, ABBC's bonds were trading near their par value.
a. What doesABBC's capital structure looklike?
b. What isABBC's weighted average cost ofcapital?
c. IfABBC'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
13 percent, what would thefirm's weighted average cost of capital be(assuming the cost of debt and tax rate do notchange)?
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