Question
The following data pertains to Zonk Corp., a manufacturer of ball bearings (dollar amounts in millions): Total assets $7460 Interest-bearing debt $3652 Average pre-tax borrowing
The following data pertains to Zonk Corp., a manufacturer of ball bearings (dollar amounts in millions):
Total assets | $7460 |
Interest-bearing debt | $3652 |
Average pre-tax borrowing cost | 10.5% |
Common equity: | |
Book value | $2950 |
Market value | $13685 |
Income tax rate | 35% |
Market equity beta | 1.13 |
Assume that Zonk is a potential leveraged buyout candidate. Assume that the buyer intends to put in place a capital structure that has 70 percent debt with a pretax borrowing cost of 14 percent and 30 percent common equity. Compute the weighted average cost of capital for Zonk based on the new capital structure.
a. 13.06%
b. 12.56%
c. 13.01%
d. 9.94%
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