Use the following information:
Debt: $72,000,000 book value outstanding. The debt is trading at 92% of book value.
The yield to maturity is 8%. Equity: 2,200,000 shares selling at $39 per share.
Assume the expected rate of return on Federated stock is 17%. Taxes: Federated marginal tax rate is Tc = 0.34.
Suppose Federated Junkyards decides to move to a more conservative debt policy. A year later its debt ratio is down to 15.75% (D/V = 0.1575). The interest rate has dropped to 7.6%. The companys business risk, opportunity cost of capital, and tax rate have not changed. Use the three-step procedure to calculate Federated WACC under these new assumptions.