1. As a professional investment manager, you contemplate buying a zero-coupon Treasury bill for your investment portfolio. The bond has 5 years to maturity, a face value of £50,000 and currently sells for £25,000.”

1. “Your required rate of return is equivalent to your company’s WACC.
   
   Your company intends to main its current capital structure as it raises new finance, and it is currently financed as follows:
   
   50,000 ordinary shares. Each share is expected to pay £1.30 dividend next year; the dividend is expected to grow 5% annually for four years, stay fixed year 5 onwards. Ordinary shareholders require a 9% rate of return.”

2. “40,000 preference shares, paying a fixed dividend of £1 with a face value of £20. The required rate of return for preference shares is calculated according to the CAPM, and you are told to assume a risk-free rate of 1.5, a beta of 1.8, and a market risk premium of 11%.”
3. “10,000 bonds. Each bond pays an annual coupon of 7%, has a face value of £100, and four years to maturity. The bond currently sells for £82. Assume that the corporate tax rate is zero.”

“Required: Should you accept or reject the investment opportunity? Show your workings clearly. [12 marks]”

Answer rating: 100% (QA)

Assuming that the company plans to maintain its current capital structure the WACC can be calculated ... View the full answer