ABC Ltd has decided to use the weighted average cost of capital (WACC) to discount the after-tax cash flows associated with project evaluation. You have been given the task of determining the after-tax WACC of the firm. You are informed that ABC Ltd uses the following securities to fund its operation: - 40,000 individual bonds with 6%, 10-year $1,000 face value that were issued 5 years ago have 5 years remaining and offer a coupon that is paid half-yearly. The current market interest rate for these bonds is 7% per annum. - 2,500,000 ordinary shares, with an expected dividend of 60 cents next year. Dividends are expected to grow at 5% per annum perpetually. The current share price is $30. . Using the historical data, the covariance between the returns of ABC Ltd and the returns of S&P/ASX200 is found to be 0.0015 and the standard deviation of S&P/ASX 200 returns is 0.04. The risk-free rate is currently 3% per annum, and the market risk premium is 6% per annum. - For the cost of equity calculation, ABC Ltd has decided to use the average of two values obtained from the constant growth model and the CAPM. * 1,000,000 preference shares, which pay an annual dividend of 50 cents. Each preference share trades at a market price of $10. - The company tax rate is 30%. Required: a) Compute the WACC. (16 marks) b) ABC Ltd is considering an acquisition of Moon Ltd whose WACC is 10%. Your company's purchase of Moon Ltd will cost 50 million, and will generate cash flows of $10 million per year for the next 10 years and the cost of environmental clean-up is expected to be $500,000 per year starting from year 1 in perpetuity. What is the NPV of the acquisition? Should your company go ahead with the acquisition and why? (4 marks)