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

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

Image Transcription

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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