Tea Cozy Ltd operates a very successful chain of tea shops in New Zealand. Currently the company
Question:
Tea Cozy Ltd operates a very successful chain of tea shops in New Zealand. Currently the company is contemplating expanding its operations to Australia's east coast. The company's balance sheet as at 31 March 2021 is as follows:
Balance Sheet
Cash $ 1,500,000
Accounts receivable $ 2,400,000
Inventories $ 1,310,000
Property, Plant & Equipment (net) $ 2,500,000
Total Assets $ 7,710,000
Long-term debt $ 4,000,000
Common equity $ 3,710,000
Total debt and equity $ 7,710,000
The company's current market price of its common equity is twice (two times) its book value. The company's beta is 0.8; the market risk premium is 6%; and the risk-free rate is 3%.
Long-term debt comprises bonds with a current market yield of 9%. The market value of the company's bonds is quoted as 95% of the bonds' book value.
The company's tax rate is 30%.
Required: Formulas are provided on the last pages of this question booklet
a) Calculate the firm's cost of common equity
b) What is Tea Cozy Ltd's cost of debt?
c) What is the company's weighted average cost of capital?
Foundations Of Finance
ISBN: 9780135160619
10th Edition
Authors: Arthur J. Keown, John H. Martin, J. William Petty