Brecon Co has the opportunity to invest in a significant investment project. The finance director suggests the company’s existing cost of capital would be a suitable discount rate for the appraisal and has tasked you with its calculation.

Relevant capital structure details for Brecon Co as at 31 December 2020 is as follows:

Note	£
Ordinary Shares (25p nominal value)	(1)	200,000
Reserves	30,000
10% Preference Shares (£1 nominal value)	(2)	250,000
8% Redeemable Bonds 2026	(3)	200,000
9% Irredeemable Loan Stock	(4)	100,000

Notes:

1. The ordinary shares have a current market price of £2.50 each (ex-div). The 2020 annual ordinary dividend has just been paid at 20.4 pence per share. Future dividends are expected to grow at the same annual rate as they have since 2017.
   • Past dividends for the preceding three years were:

Year	Dividend per share
2017	17.7 pence
2018	18.6 pence
2019	19.5 pence

2. The preference shares have a current market price of £0.80 each (ex-div) and the 2020 annual preference dividend has just been paid.

3. The redeemable bonds have a current market price of £97.50 (ex-interest) per £100 nominal and the 2020 annual interest has just been paid. The bonds will be redeemed on 31 December 2026 at a 3% premium on their £100 nominal value.

4. The irredeemable loan stock has a current market price of £105 (ex-interest) per £100 nominal and the 2020 annual interest has just been paid.

5. The company pays corporation tax at a rate of 20% p.a.

Required:

a) What is the Weighted Average Cost of Capital (WACC) of Brecon Co.

b) Critically discuss how Brecon Co can calculate a project-specific cost of capital using CAPM as an alternative to using WACC. Your answer should highlight when it would be suitable to do so and explain the risk assumptions involved.