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 companyplans 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%, anequity beta of 0.28, and a market risk premium of 5.9%.Beta0.580.28% Equity95%86%% Debt5%14%CoffeeStopBrown-Forman LiquorsNote: 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.)

WACC = Ke % of equity + Kd % of debtKe = Cost of equity, Kd = After tax Cost of debt

Answered: CoffeStop should use a WAAC rate of %…

Business

Finance

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

Section: Chapter Questions

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Concept explainers

Vertical Statement Analysis

Vertical statement analysis is a financial statements analysis tool that is used to establish a correlation between the base item and every line item in the financial statements. In vertical statement analysis, each line item in financial statements is reflected as a percentage of the base item. In the income statement, each line item is represented as a percentage of the gross turnover because gross turnover is considered as a base figure in income statement analysis. In the balance sheet, each line item is reflected as a percentage of total assets or liabilities.

Question

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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