Weighted Average Cost of Capital

This time, imagine you are a recent BCom graduate and have started working for PureMeat Company, a small but successful meat processing business that delivers premium cuts fresh, packaged and frozen to all supermarket chains across both the South and North Islands of New Zealand. PureMeat is currently in the process of evaluating whether to expand its business into Asian countries. The most recent balance sheet at fiscal year end 2021 is as follows:

PureMeat Corporation Balance Sheet as at 30 April 2021

Assets	$000		Liabilities & Equity	$000
Cash	75		Accounts Payable	672
Accounts Receivable	855		Accrued Marketing Expense	9
Inventory	650		Accrued G&A Expense	18
Total Current Assets	1,580		Total Current Debt	699
Fixed Assets	1,957		Long Term Debt	700
Accumulated Depreciation	(795)		Share capital	950
Net Fixed Assets	1,162		Retained Earnings	393
Total Assets	2,742		Total Debt and Equity	2,742

The company has 550,000 shares outstanding, which are selling for $3.98 per share.

Its debt is selling at book value with a yield to maturity of 8.8%.

From available market data you estimate the return on the market and inflation to be 9.5% and 1.5% respectively.

The company's beta is 1.45 and the company tax rate in New Zealand is 28%.

Questions

a. Calculate the weighted average cost of capital.

b. Based on a rough estimate of the project's free cash flows that management provided, you calculate a large internal rate of return of 27.5%. Despite your concerns that the management might be a little too optimistic with their forecasts, would you recommend pursuing the international expansion into Asia?