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.