(a) An Australian company has total assets of $150 million and debt of $30 million. The firms before-tax cost of debt is 5% and its cost of equity is 12%. If the corporate tax rate is 30%, calculate the firms cost of capital and the appropriateness of its use as a discount rate in capital budgeting.

(b) Assume AUD = 0.58 GBP and inflation is 3.5% pa in Australia and 7% pa in Great Britain. Estimate the AUD/GBP spot rate in one years time and comment on the accuracy of this estimate.