Reference no: EM132585511

Pedro's Plumbing has a number of retail outlets in the Ottawa area. The company's capital structure consists of $40,000,000 of long-term debt, which carries an interest rate of 8% (the tax rate is 25%), and $60,000,000 of equity, on which the shareholders expect a return of 20%.

Required:

Question a) Calculate the weighted average cost of capital.

Question b) If the company used $40,000,000 of surplus cash to repay the debt, what would happen to the weighted average cost of capital?

Question c) If the company borrowed an additional $40,000,000 and used it to pay the stakeholders a $40,000,000 dividend, what would happen to the weighted average cost of capital?