Diversified plc is trying to introduce an improved method of assessing investment projects using discounted cash flow techniques For this it has to obtain a cost of capital to use as a discount rate The finance department has assembled the following information The company has an equity beta of 1 5...

Diversified plc is trying to introduce an improved method of assessing investment projects using discounted cash flow

Question:

Diversified plc is trying to introduce an improved method of assessing investment projects using techniques. For this it has to obtain a to use as a discount rate. The finance department has assembled the following information:
- The company has an equity beta of 1.50, which may be taken as the appropriate adjustment to the average risk premium. The yield on risk-free government securities is 7 per cent and the historic premium above the risk-free rate is estimated at 5 per cent for shares.
- The market value of the firm's equity is twice the value of its debt.
- The cost of borrowed money to the company is estimated at 12 per cent (before tax shield benefits).
- tax is 30 per cent.
Assume: No inflation.
Required
Estimate the equity using the (CAPM). Create an estimate of the weighted average (WACC).
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