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 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	$2,130,000
Accounts receivable	4,510,000
Inventories	1,370,000		Long-term debt	$8,325,000
Net property, plant, and equipment	32,062,000		Common equity	31,747,000
Total assets	$40,072,000		Total debt and equity	$40,072,000

.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 37 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)?

I NEED ANSWERS TO THESE QUESTIONS:

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.)

Answer 1

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