Question
Bob Corporation is considering the introduction of a new product. You are tasked with helping Bob decide whether to introduce the new product. Bob has
Bob Corporation is considering the introduction of a new product. You are tasked with helping Bob decide whether to introduce the new product. Bob has an average collection period of 30 days, a beta of 1.40, and a corporate tax rate of 30%. Bob as a forward P/E ratio of 18.2 (based on stock with a price per share of $50 and 120 shares of stock outstanding). Bob has debt of $3,000 (with a bond-rating of A). This debt was originally issued 6 years ago. Bob's bonds have an average coupon rate of 7%. None of Bobs debt is actively traded in the bond markets. However, you see that a bond recently issued by Harry Corporation (a major competitor of Bob Corporation) has a BBB bond rating and a yield to maturity of 6%. Harrys beta is 1.65, the risk-free rate is 3%, and the expected market return is 9.5%.
Estimate the weighted average cost of capital (WACC) for Bob Corporation.
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