9 Calculating cost of capital [LO 7) a) Use the following information to calculate the cost of capital for SAM Ltd, assuming that investors can remove all unsystematic risk by diversification. i) The systematic risk of SAM Ltd's equity is 0.8. i The risk-free interest rate is 10 per cent per annum. iii) The expected rate of return on the market portfolio (including the franking premium) is 15 per cenr per annum. iv The various sources of funds used by SAM Ltd and their respective market values are as follows: Source of funds Market value ($m) Debt (face value $100) 1 Equity 3 v The interest rate on the debt is 11 per cent paid annually. The debt, which is due to mature in 8 years' time, has a current market price of $111. vi) The statutory company income tax rate is 30 cents in the dollar. vii) The proportion of the tax collected from the company that is claimed by shareholders is O.60. b) Under what assumptions is the cost of capital you have calculated for SAM Ltd in (a) appropriate for a proposed project