Reference no: EM132970414
The Finance Director of Modern Life plc is trying to calculate the weighted average cost of capital (WACC) of the company. The company's financing as at 1st August 2021 is as follows.
£,000
Ordinary shares, 50 pence par value 7,500
Reserves 8,000
7% Preference shares, £1 par value 12,000
6% Bonds, redeemable in 7 years' time 16,000
43,500
Other information (as at 1st August 2021):
Ordinary share price (ex-div) £3.65 per share
Preference share price (ex-div) 84p per share
Ex-interest market price of 6% bonds £92 per £100 bond
Last 5 years' dividends (most recent last) 19p, 21p, 22p 24p, 26p per share
Profit tax stands at 30% per year. The company plans to appraise a new project costing £14 million that will deliver after-tax cash flows of £2 million per year for six years, at which point the scrap value of the project's assets are estimated to raise £10 million when sold off.
Problem 1: Discuss the circumstances under which it is appropriate for the finance director of Modern Life plc to use the company's existing weighted average cost of capital (WACC) to appraise a new project.
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