Debt: $80,000,000 outstanding book value. The debt is trading at 95% of book value. The yield to maturity is 9%.

Equity: 3,000,000 shares selling for $47 per share. Assume that the expected rate of return on Federated's stock is 18%.

Taxes: The federal marginal tax rate is T _c = .34.

Suppose Federated Junkyards decides to move to a more conservative debt policy. One year later, its debt ratio has dropped to 13.75% ( D/V = 0.1375). The interest rate has dropped to 8.6%. 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 percentage rounded to 2 decimal places.)

Weighted average cost of capital %

NOTE: the answer is not 16.31

Answer rating: 100% (QA)

To calculate Federateds weighted average cost of capital WACC under the new assumptions well follow ... View the full answer