Question

CoffeeStop primarily sells coffee. It recently int oduced a premium coffee avored liquor BF Liquors Suppose the firm faces a tax rate of 40 and collects the following information. If it plans to finance new liquor-focused division with debt and the rest with equity, what WACC should it use for its liquor division? Assume a cost of debt of 4.6%, a risk-free rate of 2.4%, and a market risk premium of 6.5%. 12% of the CoffeeStop BF Liquors Beta 0.59 0.26 %Equity 94% 88% %Debt 6% 1296 Note: Assume that the firm will always be able to utilize its full interest tax shield The weighted average cost of capital is0%. (Round to two decimal places.)

Answer 1

The weighted average cost of capital for The liquor division will be the weighted average of the individual costs of debt and cost of equity weighted by the proportions of each in the capital structure of the division

beta % debt % equity 0.88 2 BF Liquors 0.26 4 tax rate 5 cost of debt 6 risk free rate 7 market risk premium 8 cost of equity 0.4 0.046 0.024 0.065 -B6+(B2 B7) 10 Weighted Average Cost of capital (D2(1-B4)FB5)+(C2*B8) 12