Problem 3: Abercrombie and Fitch, Inc. is attempting to estimate a cost of capital for use...

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Problem 3: Abercrombie and Fitch, Inc. is attempting to estimate a cost of capital for use in analyzing a proposed expansion into the family restaurant business. They hire you to help them compute the cost of capital. You have collected the following data from Value Line for the family restaurant business: Pure Plays BE D/V EATS, Inc. 1.20 54% Great Chow 1.00 50% Showey's 1.70 61% You estimate that the market risk premium is 9 percent and the risk-free rate is 8 percent. Assuming the corporate tax rate is 35 percent for Abercrombie and the pure plays, and that Abercrombie targets a leverage ratio of 50 percent, estimate the weighted average cost of capital for Abercrombie in the restaurant business. Problem 3: Abercrombie and Fitch, Inc. is attempting to estimate a cost of capital for use in analyzing a proposed expansion into the family restaurant business. They hire you to help them compute the cost of capital. You have collected the following data from Value Line for the family restaurant business: Pure Plays BE D/V EATS, Inc. 1.20 54% Great Chow 1.00 50% Showey's 1.70 61% You estimate that the market risk premium is 9 percent and the risk-free rate is 8 percent. Assuming the corporate tax rate is 35 percent for Abercrombie and the pure plays, and that Abercrombie targets a leverage ratio of 50 percent, estimate the weighted average cost of capital for Abercrombie in the restaurant business.