Use the following information: • Debt: $76,000,000 book value outstanding. The debt is trading at 91% of book value. The yield to maturity is 10%. • Equity: 2,600,000 shares selling at $43 per share. Assume the expected rate of return on Federated's stock is 19%. • Taxes: Federated's marginal tax rate is Tc = 0.21. Suppose Federated Junkyards decides to move to a more conservative debt policy. A year later, its debt ratio is down to 14.75% (D/V= 0.1475). 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. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 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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Kl. 259.

Use the following information:
• Debt: $76,000,000 book value outstanding. The debt is trading at 91% of book
value. The yield to maturity is 10%.
• Equity: 2,600,000 shares selling at $43 per share. Assume the expected rate of
return on Federated's stock is 19%.
Taxes: Federated's marginal tax rate is Tc = 0.21.
●
Suppose Federated Junkyards decides to move to a more conservative debt policy. A
year later, its debt ratio is down to 14.75% (D/V= 0.1475). 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.
Note: Do not round intermediate calculations. Enter your answer as a percent rounded
to 2 decimal places.
> Answer is complete but not entirely correct.
13.06%
Weighted-average cost of capital
Transcribed Image Text:Use the following information: • Debt: $76,000,000 book value outstanding. The debt is trading at 91% of book value. The yield to maturity is 10%. • Equity: 2,600,000 shares selling at $43 per share. Assume the expected rate of return on Federated's stock is 19%. Taxes: Federated's marginal tax rate is Tc = 0.21. ● Suppose Federated Junkyards decides to move to a more conservative debt policy. A year later, its debt ratio is down to 14.75% (D/V= 0.1475). 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. Note: Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. > Answer is complete but not entirely correct. 13.06% Weighted-average cost of capital
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