c) Mr. Tom is holding a 5 year, 10% shs 1000 debentures. Required: Determine the value of this debenture of the cost of capital is: i) 10% ii) 8% iii) 12% (12marks) b) Lima and United are two firms with the following characteristics: Lima United EBIT 900,000 900,000 Ks 10% 10% 7.5% Debt 2,000,000 - Required: i) Calculate the WACC of Lima and United. (10marks) ii) Calculate the value of each firm using net income approach.

The following is the capital structure of Intel Ltd as at 31/12/2016.

	Shs. M
Ordinary share capital sh.10 per value	800
Retained earnings	400
10% preference share capital sh. 20 per value	200
12% debenture sh. 100 per value	400
	1,800

Additional information:

Corporate tax rate is 30%

Preference shares were issued 10 years ago and are still selling at per value Mps per value

The debenture has a 10 year maturity period. It is currently selling at sh.90 in the market.

Currently the firm has been paying dividend per share or sh. 5. The DPS is expected to grow as 5% p.a. in future. The current MPs is sh. 40.

Required:

Determine the WACC of the firm

Explain why market values and dot book values are used to determine the weights.

What are the weaknesses associated with WACC when used as the discounting rate in project appraisal