Omena Ltd is a quoted company which is financed by sh.10,000,000 ordinary shares and sh.50,000,000,irredeemable 8%,debenture.The current market value of the shares is sh.20 each ex-dividend and an annual dividend of sh.4 per share is expected to be paid each year in perpetuity. The debentures are considered to be risk-free and are valued at par. Mr.Ombati the managing director of the company is wondering whether to invest in a project which would cost sh.20 million and generate sh.3.8 million per annum in perpetuity. The project has an estimated beta value of 1.25. The return from a well-diversified market portfolio is 16%. 

Required

1. i) The weighted average cost of capital of the company.
2. ii) The Beta coefficient of the company.
3. iii) The Beta of an equivalent ungeared company ignoring taxes.
4. iv) Using suitable calculations advise the company whether or not the project should be accepted.

Answer rating: 100% (QA)

Part a The debt is issued at par Hence cost of debt Kd annual coupon rate 8 Since debt is risk free ... View the full answer