Question: Angry Greek Pizza is a privately held (not publicly traded) firm with the following balance sheet:
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($ in millions)
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Fixed assets
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100
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Short-term debt
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20
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Long-term debt
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30
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Equity
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50
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Total
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100
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Total
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100
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In addition, you obtain the following information:
The yield on the short-term debt is 100 basis points higher than the current yield of 3.5% on Treasury bonds.
The long-term debt consists of 30-year bonds that pay an annual coupon of 6% on their $1,000 face value. Similar publicly traded bonds are currently yielding 6%.
The company expects $2 million in net income for the coming year. Common stock of similar publicly traded firms currently has a price-earnings ratio of 30 and a beta of 1.2.
The estimate of the market risk premium is 5%.
The tax rate is 40%.
The company plans to use $20 million in existing cash to repay the short-term debt immediately.
Compute the company's weighted average cost of capital. Report your answer in decimal format to 3 decimal places, e.g., 7.1% would be reported as 0.071.