Calculate the company''s weighted average cost of capital

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Reference no: EM134600

Question

Pasta Pizza is a privately held (not publicly traded) firm with the subsequent balance sheet ($ in millions)

Fixed assets 100 Short-term debt 20

Long-term debt 30

Equity 50

Total 100 Total 100

Additionally, you acquire the following information

• The revenue on the short-term debt is 100 basis points higher than the current yield of 3.5% on Treasury bonds

• The long-term debt contains of 30-year bonds that pay an annual coupon of 6% on their $1,000 face value. Alike publicly traded bonds are currently yielding 6%.

• The company imagines $2 million in net income for the coming year. Common stock of alike publicly traded firms currently has a price-earnings ratio of 30 and a beta of 1.2.

• The estimation of the market risk premium is 5%.

• The tax rate is 40%.

• The company plans to utilize $20 million in existing cash to repay the short-term debt immediately.

Calculate the company's weighted average cost of capital. Report your response in decimal format to 3 decimal places, e.g., 7.1% would be reported as 0.071.

Reference no: EM134600

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