ABBC Inc. operates a very successful chain of yogurt and coffee shops spread across the southwestern part

Question:

ABBC Inc. operates a very successful chain of yogurt and coffee shops spread across the southwestern part of the United States and needs to raise funds for its planned expansion into the Northwest. The firm€™s at the close of 2009 appeared as follows:

At present the firm€™s common stock is selling for a price equal to 2.5 times its book value, the firm€™s investors require an 18 percent return, the firm€™s bonds command a yield to maturity of 8 percent, and the firm faces a tax rate of 35 percent. At the end of the previous year ABBC€™s common stock was selling for a price of 2.5 times its book value, and its bonds were trading near their par value.
a. What does ABBC€™s capital structure look like?
b. What is ABBC€™s weighted average cost of capital?
c. If ABBC€™s stock price were to rise such that it sold at 3.5 times its book value and the cost of equity fell to 15 percent, what would the firm€™s weighted average cost of capital be (assuming the cost of debt and tax rate do not change)?

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial... Capital Structure
Capital structure refers to a company’s outstanding debt and equity. The capital structure is the particular combination of debt and equity used by a finance its overall operations and growth. Capital structure maximizes the market value of a... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of... Cost Of Debt
The cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking... Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...