Umklomelo Ltd has a target capital structure of 60% equity and 40% debt. The after-tax cost of future debt is 5.5% and the cost of new equity is 13%. The financial manager is currently considering a project with an expected return of 12% which will be financed from the issue of ordinary shares as all retained income is already budgeted for in more profitable projects.

The company recently issued debentures and, as a result, the present capital structure is more heavily weighted towards debt.

Required:

1. Calculate the weighted-average cost of capital.
2. State, with reasons, whether the project under consideration should be accepted.

Answer rating: 100% (QA)

To calculate the weightedaverage cost of capital WACC we need to take into account the cost of equit... View the full answer