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Use the following information:. Debt: $79,000,000 book value outstanding. The debt is trading at 94% of book value. The yield to maturity is 7%.Equity: 2,900,000 shares selling at $46 per share. Assume the expected rate of return on Federated's stock is 16%.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 14.00% (D/V =0.1400). The interest rate has dropped to 6.6%. The company's business risk, opportunity cost of capital, and tax rate have notchanged.Use the three-step procedure to calculate Federated's WACC under these new assumptions. (Do not round intermediatecalculations. Enter your answer as a percent rounded to 2 decimal places.)Weighted-average cost of capital

Question
Use the following information:
. Debt: $79,000,000 book value outstanding. The debt is trading at 94% of book value. The yield to maturity is 7%.
Equity: 2,900,000 shares selling at $46 per share. Assume the expected rate of return on Federated's stock is 16%.
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 14.00% (D/V =
0.1400). The interest rate has dropped to 6.6%. 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. (Do not round intermediate
calculations. Enter your answer as a percent rounded to 2 decimal places.)
Weighted-average cost of capital
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Use the following information: . Debt: $79,000,000 book value outstanding. The debt is trading at 94% of book value. The yield to maturity is 7%. Equity: 2,900,000 shares selling at $46 per share. Assume the expected rate of return on Federated's stock is 16%. 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 14.00% (D/V = 0.1400). The interest rate has dropped to 6.6%. 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. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) Weighted-average cost of capital

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Step 1

Calculation of Total Market Value:

Total Market Value = [Market Value of Debt + Market Value of Equity
=[(S79,000,000x 94%) + ($2,900,000 x $46)]
[($74,260,000)+($133, 400, 000)]
= $207,660,000
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Total Market Value = [Market Value of Debt + Market Value of Equity =[(S79,000,000x 94%) + ($2,900,000 x $46)] [($74,260,000)+($133, 400, 000)] = $207,660,000

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Step 2

Calculation of New Value of Debt:

New Value of Debt =[TotalMarket Valuex New Debt Ratio]
-[s207,660,000x14%
= $29,072,400
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New Value of Debt =[TotalMarket Valuex New Debt Ratio] -[s207,660,000x14% = $29,072,400

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Step 3

Calculation of Amount of Retained Earnings:

Since the company moved to conservative debt policy, so debt is used to...

Amountof Re tained Earnings [MV of Debt - New Debt
[S74,260,000-S$29,072,400
- $45,187,600
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Amountof Re tained Earnings [MV of Debt - New Debt [S74,260,000-S$29,072,400 - $45,187,600

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