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?