Question
(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
(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 2015 appeared as follows:
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.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
16
percent. The firm's bonds command a yield to maturity of
8
percent, and the firm faces a tax rate of
34
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?
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
13
percent, what would the firm's weighted average cost of capital be (assuming the cost of debt and tax rate do not change)?
a. What is the proportion of debt financing in ABBC's capital structure?
enter your response here%
(Round to two decimal places.)
What is the proportion of equity financing in ABBC's capital structure?
enter your response here%
(Round to two decimal places.)
b. What is ABBC's weighted average cost of capital?
enter your response here%
(Round to two decimal places.)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
13
percent, what would the firm's weighted average cost of capital be (assuming the cost of debt and tax rate do not change)?
enter your response here%
(Round to two decimal places.)
HERE IS THE CHART
Cash
$1,620,000
Accounts receivable
4,480,000
Inventories
1,810,000
Long-term debt
$8,276,000
Net property, plant, and equipment
32,186,000
Common equity
31,820,000
Total assets
$40,096,000
Total debt and equity
$40,096,000
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