CoffeeStop primarily sells coffee. It recently introduced a premium coffee-flavored liquor (BF Liquors). Suppose the firm faces a tax rate of 38 % and collects the following information. If it plans to finance 13 % of the 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 5.2 %, a risk-free rate of 2.6 %, and a market risk premium of 6.8 %. Beta % Equity % Debt CoffeeStop 0.61 94 % 6 % BF Liquors 0.24 87 % 13 % Note: Assume that the firm will always be able to utilize its full interest tax shield.
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