Ambeon Holdings PLC is a publicly held company. The firm began as a textile company but grew to become a leading diversified conglomerate with a presence in industries such as textiles, porcelain, leather products, among others. At the close of 2018, the firm’s balance sheet appeared as follows:

At present, the firm’s common stock is selling for a price equal to its book value, and its bonds are selling at par. Ambeon’s managers estimate that the market requires a 14 percent return on its common stock, and the firm’s bonds command a yield to maturity of 7 percent. The firm faces a tax rate of 16 percent.

a. What is Ambeon’s weighted average cost of capital?

b. If Ambeon’s stock price were to rise such that it sold at 1.7 times book value, causing the cost of equity to fall to 12 percent, what would the firm’s cost of capital be (assuming the cost of debt and tax rate do not change)?

c. Ambeon is considering a new business opportunity involving the acquisition of a trucking firm. What do you think the firm should do to select an appropriate cost of capital for evaluating this acquisition?

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Cash $ 530,000 Accounts receivable 4,563,000 Long-term $13,090,000 Inventories 7,500,000 debt Net property, 18,982,000 Common 18,485,000 plant, and equity equipment Total assets $31,575,000 Total debt $31,575,000 and equity