Question
Cash $1,590,000 Accounts Receivable $4,860,000 Inventories $1,970,000 Long-term Debt $8,234,000 Net Property, Plant and Equipment $32,108,000 Common Equity $32,294,000 Total Assets $40,528,000 Total Debt and
Cash | $1,590,000 | ||
Accounts Receivable | $4,860,000 | ||
Inventories | $1,970,000 | Long-term Debt | $8,234,000 |
Net Property, Plant and Equipment | $32,108,000 | Common Equity | $32,294,000 |
Total Assets | $40,528,000 | Total Debt and Equity | $40,528,000 |
(Weighted average cost of capital )
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 19 percent. The firm's bonds command a yield to maturity of 8 percent, and the firm faces a tax rate of 38 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 16 percent, what would the firm's weighted average cost of capital be (assuming the cost of debt and tax rate do not change)?
***Please Show All Work***
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 is 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)?
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