Transcribed Image Text
3. Assume you have just been hired as a businessmanager of Pamela’s Pizza, a regional pizza restaurant chain. The firm is currently financed with allequity and it has 15 million shares outstanding. When you took yourcorporate finance course, your instructor stated that most firm’sowners would be financially better off if the firms used some debt. When you suggested thisto your new boss, he encouraged you to pursue the idea. As a first step, assumethat you obtained from the firm’s investment banker the following estimated costs of debt for thefirm at different capital structures: %Financed WithDebt rd 0% --- 10 8.0% 25 9.0 35 10.5 45 12.0 If the company were torecapitalize, debt would be issued, and the funds received would beused to repurchase stock. Pamela’s Pizza is in the 25 percentstate-plus-federal corporate tax bracket, itsbeta is 0.75, the risk-free rate is 4 percent, and the market riskpremium is 7 percent. For each capital structure underconsideration, calculate the levered beta, the cost of equity, and theWACC.