1a. Are the companies likely to gain with a debt component in the capital employed? Explain with the help of an example

1b. What are the flaws of the Payback Period? How can these be avoided?

1c. Which method to go with, if all investment appraisal method gives different results?

Q2. Long term capital structure of company KL is given below:

Sources of capital Book value ($ 000)

L.T. Debts 30,000

Preferred stock 5,000

Common stock 6,000

Reserves(re) 19,500

Total capital 60,500

The overall interest rate of debt is 10%, the dividend for common stockholders is $1.3per share and $1.5 for preferred stock per share, respectively. Preferred -and stock price is $13 per share. Net income of the Company is expected to be paid 40% as a dividend and 60% will be added to the retained earnings. The IRR of the company has been measured lastly as 15%, the growth rate of the dividend is 0.06. Suppose that the average income tax ratio is 30 % and the corporate tax ratio is 25 %, calculate and interpret the WACC of the Company.