Wavering Plc is trying to decide on what discount rate to use when appraising future capital investment options. It is currently financed by a mixture of debt and equity, detailed as follows: Book value £000s 1 million £1 ordinary shares 1,000 Retained earnings 1,500 7500 8% Pref. Share of £100 each 750 12,500 £100 6.4% irredeemable debentures 1,250 Mortgage at 10% interest rate (secured on premises) 250 The market price of ordinary shares is £3.00, and the debentures have a market price of £80. The company pays corporation tax at a rate of 30%. The current return on government securities is 5%, the average stock market rate of return is 9% and the company has a beta value of 1.6. The management is considering taking up a new project which would require additional investment. This project is expected to generate cash flows of £100,000 a year for two years and then £50,000 a year for the next 18 years. At the end of that period the investment will be sold for £100,000. Appraise the project using WACC calculated for Wavering Plc. Required: (a) Calculate the company’s weighted average cost of capital. (b) What is the maximum amount that you would be willing to pay for this project?
Wavering Plc is trying to decide on what discount rate to use when appraising future capital investment options. It is currently financed by a mixture of debt and equity, detailed as follows:
Book value £000s
1 million £1 ordinary shares 1,000
7500 8% Pref. Share of £100 each 750
12,500 £100 6.4% irredeemable debentures 1,250
Mortgage at 10% interest rate (secured on premises) 250
The market price of ordinary shares is £3.00, and the debentures have a market price of £80. The company pays corporation tax at a rate of 30%. The current return on government securities is 5%, the average stock market
Required:
(a) Calculate the company’s weighted average cost of capital.
(b) What is the maximum amount that you would be willing to pay for this project?
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