B2. The following information has been extracted from the balance sheet of STR Ltd Liabilities 12% Bonds, $100.00 par value $1,200,000 Shareholders' fiunds 14% Preference shares, $10.00 par value Ordinary shares, $2.00 par value Retained earnings Total shareholders' funds 1,000,000 4,000,000 1,500,000 S6,500,000 You are also given the following additional information. Interest is paid annually on the bonds, and has just been paid. The bonds mature in 6 years time and are currently selling at $88.65 *The preference shares are currently trading at $8.75 .The ordinary shares are currently trading at $3.06. STR has just paid a dividend of S0.50, and investors expect earnings and dividends to grow to a constant rate of 4 percent in the future There are no company or personal taxes levied. *The management of STR considers its present capital structure is appropriate and has no plans to change the current mix a) Determine the cost of the various capital components and STR's weighted average cost of capital. Show all your computations b)Under what circumstances is it appropriate for STR to use the weighted average cost of capital estimated above as the hurdle rate to evaluate its projects? Explain c) How would you respond to someone who argues that since STR is considering a project, in its usual line of business, which will be financed entirely by a new bond issue, the cost of debt is the appropriate hurdle rate for this project