The Grubby Brushes Co. Limited has the following capital structure:

The holders of the ordinary shares expect a dividend of 14 per cent per annum. Debenture interest is an allowable charge against corporation tax which stands at 30 per cent.
The directors are considering the re-equipment of the production departments to enable the company to compete more effective

(a) Calculate the company’s weighted average cost of capital (to nearest whole per cent).
(6 marks)

(b) Using your answer to

(a) calculate the NPV (Net Present Value) of the two projects.
(8 marks)

(c) Using your answer to

(b) state which project you would recommend and why. (5 marks)

(d) Would your answer to

(c) be different if you knew that the estimated net cash flows for the two projects in year 5 were (Scheme 1) £23,000 and (Scheme 2) £32,000? Give your reasons.

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000 Ordinary shares (fully paid) 1,000 Preference shares (11%) 400 Debentures (10%) 600