Use the following information:
Debt: $80,000,000 book value outstanding. The debt is trading at 95% of book value. The yield to maturity is 9%.
Equity: 3,000,000 shares selling at $47 per share. Assume the expected rate of return on Federated’s stock is 18%.
Taxes: Federated’s marginal tax rate is Tc = .34.
Suppose Federated Junkyards decides to move to a more conservative debt policy. A year later its debt ratio is down to 13.75% (D/V = .1375). The interest rate has dropped to 8.6%. The company’s business risk, opportunity cost of capital, and tax rate have not changed.
Use the three-step procedure to calculate Federated’s WACC under these new assumptions. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)
Weighted-average cost of capital %