Question 3 (20 marks) Moon Ltd has decided to use the weighted average cost of capital (WACC) to discount the after-tax cash flows associated with project evaluation. You have been given the task of determining the after-tax WACC of the firm. You are informed that Moon Ltd uses the following securities to fund its operation: 10,000 individual bonds with a face value of $1,000 that will mature in 6 years' time and offer a coupon that is paid half-yearly. The coupon rate for these bonds is 6% per annum. The current market interest rate for these bonds is 8% per annum. 700,000 ordinary shares, which recently paid a dividend of 50 cents. Dividends are expected to grow at 5% per annum perpetually. The current share price is $25. The beta of Moon Ltd is 1.2, the risk-free rate is currently 2% per annum, and the market risk premium is 6% per annum. For the cost of equity calculation, Moon Ltd has decided to use the average of two values obtained from the constant growth model and the CAPM model. 300,000 preference shares, which pay an annual dividend of $2.50. Each preference share trades at a market price of $30. The company tax rate is 30%. Required: a) Compute the WACC. (14 marks) b) Moon Ltd is considering an acquisition of River Rocks Ltd whose WACC is 12% Moon Ltd's purchase of RiverRocks will cost 100 million, and will generate cash flows that start at $10 million in Year 1 and then grow at 3% per year forever. The cost of environmental clean-up is expected to be $500,000 per year starting from Year 10 in perpetuity. What is the NPV of the acquisition? Should Moon Ltd go ahead with the acquisition and why? (6 marks) EE % 22 o