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Required: a) Calculate the (WACC) and discuss the appropriateness of using this as a discount rate to appraise the project. Include a comparison using the cost of equity or the cost of debt as a discount rate.

Required: a) Calculate the (WACC) and discuss the appropriateness of using this as a discount rate to appraise the project. Include a comparison using the cost of equity or the cost of debt as a discount rate.

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Question 3 - Financing and Budgeting (LO3) Sussex Plc is planning a new product which will be sold to trade customers on 60 day credit terms. All investment and manufacturing costs will need to be paid either in the month of purchase or the month after. The project has been appraised by discounting future cash flows at a rate equal to the weighted average cost of capital (WACC). Budgets for the new product have determined that they need to raise long term finance of £50m, and short term finance of £10m. Short term finance needs will be met using existing bank overdraft facilities. The long term finance will be raised entirely by the issue of new long-term debt. Sussex Plc has historically financed its activities with 50% debt and 50% equity. Current market data suggest that these sources of finance have the following costs: Cost of equity 11% Cost of debt 4% Note: Assume Corporation Tax rate to be charged at 25% Required:
Transcribed Image Text:Question 3 - Financing and Budgeting (LO3) Sussex Plc is planning a new product which will be sold to trade customers on 60 day credit terms. All investment and manufacturing costs will need to be paid either in the month of purchase or the month after. The project has been appraised by discounting future cash flows at a rate equal to the weighted average cost of capital (WACC). Budgets for the new product have determined that they need to raise long term finance of £50m, and short term finance of £10m. Short term finance needs will be met using existing bank overdraft facilities. The long term finance will be raised entirely by the issue of new long-term debt. Sussex Plc has historically financed its activities with 50% debt and 50% equity. Current market data suggest that these sources of finance have the following costs: Cost of equity 11% Cost of debt 4% Note: Assume Corporation Tax rate to be charged at 25% Required:
Required: a) Calculate the (WACC) and discuss the appropriateness of using this as a discount rate to appraise the project. Include a comparison using the cost of equity or the cost of debt as a > discount rate.
Transcribed Image Text:Required: a) Calculate the (WACC) and discuss the appropriateness of using this as a discount rate to appraise the project. Include a comparison using the cost of equity or the cost of debt as a > discount rate.
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