83. Diageo plc is a property development business operating in the London area. The business has the following capital structure as at 30 November Year 9: 000 1 ordinary shares 10,000 Retained earnings 20,000 9% loan notes 12.000 42.000 The ordinary shares have a current market value of 3.90 and the current level of dividend is 20p per share. The dividend has been growing at a compound rate of 4 percent a year in recent years. The loan notes of the business are irredeemable and have a current market value of 80 per 100 nominal. Interest due on the loan notes at the year-end has recently been paid. The business has obtained planning permission to build a new office block in a redevelopment area. The business wishes to raise the whole of the finance necessary for the project by the issue of more irredeemable 9 percent loan notes at 80 per 100 nominal. This is in line with a target capital structure set by the business where the amount of loan capital will increase to 70 percent of ordinary share capital within the next two years. The tax rate is 25 percent. TURN OVER Copyright 2022 v010 University of Southampton Page 5 of 8 MANG2014 W1 Required: (i) Why is it important for a business to calculate its cost of capital with care? (ii) Calculate the weighted average cost of capital of Diageo plc that should be used for future investment decisions. (iii) Discuss the traditional view of capital structure theory