Cash Accounts receivable Inventories Net property, plant, and equipment Total assets

$ 2,010,000 4,580,000 1,540,000 32,575,000 $40,705,000

Long-term debt $ 8,141,000 Common equity 32,564,000 Total debt and equity $40,705,000

0

$13.50 $154

= = 0.0877 = 8.77%

2. 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 firms balance sheet at the close of 2009 appeared as follows:

At present the firms common stock is selling for a price equal to 2.5 times its book value, the firms investors require an 18 percent return, the firms bonds command a yield to maturity of 8 percent, and the firm faces a tax rate of 35 percent. At the end of the previous year ABBCs common stock was selling for a price of 2.5 times its book value, and its bonds were trading near their par value.

a. What does ABBCs capital structure look like?

b. What is ABBCs weighted average cost of capital?

c. If ABBCs stock price were to rise such that it sold at 3.5 times its book value and the cost of equity fell to 15 percent, what would the firms weighted average cost of capital be (assuming the cost of debt and tax rate do not change)?