1. ?(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:
Cash,"$2,170,000",,,
Accounts receivable,"4,340,000",,,
Inventories,"1,850,000",,Long-term debt,"$8,077,000"
"Net property, plant, and equipment","32,334,000",,Common equity,"32,617,000"
Total assets,"$40,694,000",,Total debt and equity," $40,694,000"
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 18 percent. The? firm's bonds command a yield to maturity of 7 percent, and the firm faces a tax rate of 36 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 15 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? ?% (Round to two decimal? places.)
What is the proportion of equity financing in? ABBC's capital? structure? ?% (Round to two decimal? places.)
b. What is? ABBC's weighted average cost of? capital? ?% (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 15 percent, what would the? firm's weighted average cost of capital be? (assuming the cost of debt and tax rate do not? change)? ?% (Round to two decimal? places.)