1. What will be the cost for each source of financing? Consider both DDM (i.e. Dividend Discount Model) and CAPM (i.e. Capital Asset Pricing Model) method for common equity. Provide your comments on the assumptions of each approach and their merits and limitations.  

2. Determine the optimum cost of capital using the Weighted Average Cost of Capital (WACC) approach for target capital structure. (Hints: Ms Helen would prefer to use CAPM over DDM).

Evaluate the total value addition (i.e. total NPV) and breakeven rate (i.e. IRR) of this possible restructuring decision. (Hints: Use the WACC as your discount rate to evaluate the investment projects)

Answer rating: 100% (QA)

WACC and CAPM The weighted average cost of capital WACC can be used as the discount rate in investment appraisal provided that some restrictive assumptions are met These assumptions are as follows the ... View the full answer