In your analysis of the cost of capital for an ordinary share, you calculate a cost capital using a dividend discount model that is much lower than the calculation for the cost of capital using the CAPM model.

Requirement-a.Explain the possible sources for the discrepancy.After resolving the problem as stated above, for calculating correctly the cost of the ordinary share in your cafe businesses,you set a dividend policy with an average growth rate of 4.25 per cent that you plan to keep forever.You recently hired a business appraiser to estimate the value of your shares, which includes all of the 96 million outstanding ordinary shares. Her report indicates that they are worth $568 million.The appraiser reports that the beta of the company is 1.26.

In order to finance 1,880 restaurants that are now part of your company, you have issued two different bonds 4 years ago. 200,000 outstanding 15-year 8.1% Bond-K with $1000 face value is currently selling at $1,231. On the other hand,750,000 outstanding 20-year 11.2% Bond-Q with $200 face value is currently yielding 9.5 per cent.

You company has 10 million outstanding 12.1 per cent preference shares of $5 issue price.Preference shares are currently selling at $6.18 per share.Interest is compounded monthly for 11.1 per cent loan (long term) of $52 million.

Market expect 16.3 per cent return from shares of this cafe business. Tax rate is 32 per cent.

Requirement-b.Estimate the WACC for this Cafe business.

Requirement-c.Explain the way you can use your calculated WACC in evaluating two new projects: Project-H with beta coefficient 0.56 and expected return 9.00 per cent; and Project-L with beta coefficient 2.4 and expected return 22.41 per cent.