$($c$)$ Wendy Plc is trying to decide on what discount rate to use when

appraising future capital investment options. It is currently financed by

a mixture of debt and equity, detailed as follows:

Book value

$000$s

$1$ million $1$ ordinary shares $1,000$

Retained earnings

$750$k $8\%$ Pref. Share of $1$ each

$1,500$

$750$

$12,5001006\mathrm{.}4\%$ irredeemable

debentures

$1,250$

Mortgage at $10\%$ interest rate

$($secured on premises$)$

$250$

The market price of ordinary shares is $3\mathrm{.}00,$ and the debentures have a market price of

$80.$ The company pays corporation tax at a rate of $30\%.$ The current return on

government securities is $5\%,$ the average stock market rate of return is $9\%$ and the

company has a beta value of $1\mathrm{.}6.$

The management is considering taking up a new project which would require additional

investment. This project is expected to generate cash flows of $100,000$ a year for two

years and then $50,000$ a year for the next $18$ years. At the end of that period the

investment will be sold for $100,000.$ Appraise the project using WACC calculated for

Wendy plc$.$

Requirement

$($a$)$Calculate the company$$s weighted average cost of capital.

$($b$)$What is the maximum amount that you would be willing to pay for this project?