(Weighted average cost of capital)

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 firm's balance sheet at the close of 2019 appeared as follows:

At present, the firm's common stock is selling for a price equal to 3 times its book value, and the firm's investors require a return of 15 percent. The firm's bonds command a yield to maturity of 9 percent, and the firm faces a tax rate of 27 percent. At the end of the previous year, ABBC's bonds were trading near their par value.

a. What does ABBC's capital structure look like?

a. What is the proportion of debt financing in ABBC's capital structure?

b. What is ABBC's weighted average cost of capital?

c. If ABBC's stock price were to rise such that it sold at 3.5 times its book value and the cost of equity fell to 12 percent, what would the firm's weighted average cost of capital be (assuming the cost of debt and tax rate do not change)?

d. Historically, ABBC has owned each of its yogurt shop stores. The firm's new CFO has asked you to consider the potential effect on the firm's cost of capital if it were to sell the stores to a real estate investor with an agreement to lease them back (i.e., rent them).

Cash	$2,250,000
Accounts receivable	4,020,000
Inventories	1,690,000		Long-term debt	$8,852,000
Net property, plant, and equipment	32,866,000		Common equity	31,974,000
Total assets	$40,826,000		Total debt and equity	$40,826,000