Question: QUESTION TWO B plc has the following capital structure: K000 Ordinary shares K0.40 5,000 Retained earnings 500 10% Preference shares at K1 1,500 10% K100

QUESTION TWO B plc has the following capital structure: K000 Ordinary shares K0.40 5,000 Retained earnings 500 10% Preference shares at K1 1,500 10% K100 redeemable debentures 3,000 Total funds employed 10,000 The market price of the preference shares is 80n ex-div, the ordinary shares are quoted at K1.62 cum-div per share. Debenture stock is quoted at K97.5 ex-interest per K100 nominal and will be redeemable at par in exactly 7 years time. B plc has just declared dividend of K1,500,000 in total for all issued ordinary shares. The dividend growth rate is 4% per year forever. Company tax is 30% per year. The market rate of return is 12% and the company has an equity beta value of 1.25 Required: a) Calculate WACC based on market values. b) Discuss the implications of using a wrong WACC value in project appraisal and comment on the current level of capital gearing.

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