Reference no: EM133061120

Nile Plc is considering a new project and it wishes to estimate the cost of capital for purposes of appraising the investment. The company has an issued share capital of 1 million ordinary shares of £1 each; it has also issued £800,000 of debentures.  The market price of ordinary shares is £4.76 per share and debentures are priced at £69 per £100 NV.  Dividends and interest are payable annually.  An ordinary dividend has just been paid, as has an interest instalment. Debentures are redeemable at par in eight years' time.

A summary of the most recent balance sheet is as follows (in £000):

Dividends and profits have been as follows (all in £000):

Any earnings not paid as dividends are retained within the company.  Assume that there have been no changes in tax rates during the last five years and that the rate of corporation tax is 30%.  Ignore income tax. 

REQUIRED:

(a) Estimate Nile's costs of equity and debt capital.

(b) Estimate Nile's weighted average cost of capital.      

(c) Discuss any difficulties and uncertainties in your estimation.