Question
Use the following information: Debt: $74,000,000 book value outstanding. The debt is trading at 90% of book value. The yield to maturity is 10%. Equity:
Use the following information: Debt: $74,000,000 book value outstanding. The debt is trading at 90% of book value. The yield to maturity is 10%. Equity: 2,400,000 shares selling at $41 per share. Assume the expected rate of return on Federateds stock is 19%. Taxes: Federateds marginal tax rate is Tc = 0.21. Suppose Federated Junkyards decides to move to a more conservative debt policy. A year later, its debt ratio is down to 15.25% (D/V = 0.1525). The interest rate has dropped to 9.6%. The companys business risk, opportunity cost of capital, and tax rate have not changed. Use the three-step procedure to calculate Federateds WACC under these new assumptions. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.
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