Rob plc has decided that in order to make better investment appraisal decisions they need to re-calculate the company's cost of capital. The following information is from the company's statement of financial position (balance sheet): | (millions) 890 Fixed assets: Current assets: 370 Current liabilities: (220) Non-current liabilities: (160) 5% Bonds (100 par) redeemable in 7 years 4% Irredeemable Bonds (100 par) Bank Loan (190) (120) 180 Share capital and reserves Ordinary Shares (nominal value 50p) 7% Preference shares (1 nominal value) Reserves 100 290 Additional information: The risk-free rate of return on short-dated government bonds is currently 3%. The market risk premium has been estimated at 7% and the company's beta is 1.5. The company's ordinary share price is 3 and the preference share price is 0.8. The irredeemable bonds are currently trading at a 5% discount to par value and the redeemable bonds are currently trading at 105. The rate of interest payable on the loan is 8% and the corporation tax rate is 25%. Required: a) Explain the role of the weighted average cost of capital (WACC) in financial decision-making. (5) b) Calculate the cost of each source of finance used by Robinson plc, including their reserves. (15) c) Discuss why market values rather than book values should be used when calculating the WACC