Question: QUESTION TWO B ple has the following capital structure: K'000 Ordinary shares - K0.40 4,000 Retained earnings 2,500 10% Preference shares at K0.5 2,000 12%

QUESTION TWO B ple has the following capital structure: K'000 Ordinary shares - K0.40 4,000 Retained earnings 2,500 10% Preference shares at K0.5 2,000 12% K100 redeemable Debentures 2,000 15% Bank loan 1,500 Total funds employed 12,000 The market price of the preference shares is 80n ex-div, the ordinary shares are quoted at K1.40 ex-div per share. Debenture stock is quoted at K88.95 ex-interest per K100 nominal and will be redeemable at par in exactly 7 years' time. B plc has a marginal rate of corporation tax of 30%. The current risk free rate of return is 5%, 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

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