CoffeStop should use a WAAC rate of % to evaluate the Brown-Forman Liquor division. (Round to two decimal places.)

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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CoffeeStop primarily sells coffee. It recently introduced a premium coffee-flavoured liquor. Suppose the firm faces a tax rate of 35% and collects the information in the table below. If the company
plans to finance 14% of the new liquor-focused division with debt and the rest with equity, what WACC should it use for its liquor division? Assume a cost of debt of 4.9%, a risk-free rate of 4.2%, an
equity beta of 0.28, and a market risk premium of 5.9%.
Beta
0.58
0.28
% Equity
95%
86%
% Debt
5%
14%
CoffeeStop
Brown-Forman Liquors
Note: Assume that the firm will always be able to utilize its full interest tax shield.
CoffeStop should use a WAAC rate of % to evaluate the Brown-Forman Liquor division.
(Round to two decimal places.)
Transcribed Image Text:CoffeeStop primarily sells coffee. It recently introduced a premium coffee-flavoured liquor. Suppose the firm faces a tax rate of 35% and collects the information in the table below. If the company plans to finance 14% of the new liquor-focused division with debt and the rest with equity, what WACC should it use for its liquor division? Assume a cost of debt of 4.9%, a risk-free rate of 4.2%, an equity beta of 0.28, and a market risk premium of 5.9%. Beta 0.58 0.28 % Equity 95% 86% % Debt 5% 14% CoffeeStop Brown-Forman Liquors Note: Assume that the firm will always be able to utilize its full interest tax shield. CoffeStop should use a WAAC rate of % to evaluate the Brown-Forman Liquor division. (Round to two decimal places.)
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