Consider the following information for Federated Junkyards of America. Debt: $80,000,000 book value outstanding. The debt is trading at 95% of book value. The yleld 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 Te = 0.21. Calculate the weighted-average cost of capital (WACC). (Do not round Intermedlate calculatlons. Enter your answer as a percent rounded to 2 decimal places.)

Consider the following information for Federated Junkyards of America. Debt: $80,000,000 book value outstanding. The debt is trading at 95% of book value. The yleld 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 Te = 0.21. Calculate the weighted-average cost of capital (WACC). (Do not round Intermedlate calculatlons. Enter your answer as a percent rounded to 2 decimal places.)

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter11: Determining The Cost Of Capital

Section: Chapter Questions

Problem 9P: Bond Yield and After-Tax Cost of Debt A companys 6% coupon rate, semiannual payment, 1,000 par value...

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Debt: $69,000,000 book value outstanding. The debt is trading at 95% of book value. The yield to maturity is 10%. Equity: 1,900,000 shares selling at $36 per share. Assume the expected rate of return on Federated's stock is 19%. • Taxes: Federated's marginal tax rate is T_{c} = 0.21 . Suppose Federated Junkyards decides to move to a more conservative debt policy. A year later, its debt ratio is down to 16.50% (D/V= 0.1650). The pre-tax cost of debt has dropped to 9.6%. 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.
QUESTION 5 You are Chief Financial Officer of the ABC Corporation. ABC has two divisions, one of which is retail, and the other is manufacturing. ABC's debt-equity ratio (measured at market value) is one half. The company has $2.5 billion in face value of perpetual bonds which pay an annual coupon of 4% and have a yield to maturity of 10%. ABC's equity has a beta of 1.25. The company faces a 35% tax rate. The risk-free rate of return is 5.6% and the market risk premium, over and above the risk-free rate, is 8%. The company is considering a business expansion in the retail industry. The expansion project will generate $20 million free cash flow per year indefinitely. ABC is planning to maintain the industry average leverage ratio for the expansion project. Companies that operate purely in the manufacturing industry have an average beta of 0.8 and an average debt-equity ratio (measured at market value) of three quarter. Companies that operate purely in the retail industry have an average…
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