Question
Frutty, Inc., an all-equity firm, produces apple and orange juices. One third of Fruttys assets consists of an apple-juice-producing factory, while the rest of the
Frutty, Inc., an all-equity firm, produces apple and orange juices. One third of Fruttys assets consists of an apple-juice-producing factory, while the rest of the assets are devoted to orange juice production. You are given the following information about Fruttys competitors: Apples Corporation: produces apple juice; ROE = 12%; Debt/Equity = 2 3 ; debt interest rate is 7%; Oranges Corporation: produces orange juice; ROE = 14%; Debt/Equity = 2; debt interest rate is 10%. If the risk-free rate is 5%, the expected return on the market portfolio is 15%, and the corporate tax rate is 25%, what is your estimate of Fruttys WACC?
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