Question
Frosty Company earned an operating profit of $550,000 before taxes of 40%. Net operating assets (Invested Capital) total $2.4 million. Capital employed but not included
Frosty Company earned an operating profit of $550,000 before taxes of 40%. Net operating assets (Invested Capital) total $2.4 million. Capital employed but not included in operating assets (mainly R&D and personnel costs) are an additional $1.6 million. Frostys common stock is $4,000,000 (risk free rate is 6%, and risk premium is 6%). There are two types of bonds: $4,000,000 of Bond1 that pays interest 8%, and $2,000,000 of Bond2 that pays interest 10%.What is total weighted average cost of capital?
a. 7.92%
b. 6.0%
c. 10.0%
d. 10.4%
e. none of the above
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