Calculate the Weighted Average Cost of Capital (WACC) using the Capital Asset Pricing Model (CAPM) to estimate the cost of equity.

(b) Calculate the financial viability of the expansion project using the Net Present Value (NPV) method and provide a recommendation whether or not this project should proceed.

(c) XYZ paid a dividend of 10 pence per share last year. The current share price is 132 pence. In the last five years dividends paid by XYZ have grown at an average rate of 5% per annum. Estimate the cost of equity using the Dividend Valuation Model (DVM) and a revised WACC.

Also calculate the impact of this change on the NPV of the expansion project and comment on whether this changes your recommendation in (b).

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XYZ plc plans to expand its production capacity. This will require investment in a new plant. The expected cash flows relating to the project are given below. Year Initial investment in plant £m £m 200 250 300 350 Pre-tax net operating cash flows Additional working capital of £30m will be required which will be released at the end of the life of the project. Capital allowances on the initial investment in a plant are to be claimed in four equal instalments. The corporate tax rate is 25%. Tax is paid in the same year that the relevant taxable cash flows are generated. All operating cash flows are liable to tax. 0 1 2 (800) 3 4 The company's shares have a beta equity of 0.925 and the risk-free rate of interest is 3% while the expected return on a market portfolio is 12.25%. The company is likely to maintain its current gearing of 30%. XYZ's long term debt is primarily funded through corporate bonds. XYX's corporate bonds currently have a credit rating of A- and pay a credit risk premium of 100 basis points. XYZ plc plans to expand its production capacity. This will require investment in a new plant. The expected cash flows relating to the project are given below. Year Initial investment in plant £m £m 200 250 300 350 Pre-tax net operating cash flows Additional working capital of £30m will be required which will be released at the end of the life of the project. Capital allowances on the initial investment in a plant are to be claimed in four equal instalments. The corporate tax rate is 25%. Tax is paid in the same year that the relevant taxable cash flows are generated. All operating cash flows are liable to tax. 0 1 2 (800) 3 4 The company's shares have a beta equity of 0.925 and the risk-free rate of interest is 3% while the expected return on a market portfolio is 12.25%. The company is likely to maintain its current gearing of 30%. XYZ's long term debt is primarily funded through corporate bonds. XYX's corporate bonds currently have a credit rating of A- and pay a credit risk premium of 100 basis points.