Consider a company that has funding of 40% debt, 50% ordinary shares and 10% preference shares, a cost of debt (before tax) of 2%, a cost of ordinary shares of 7%, a cost of preference shares of 8% and a tax rate of 30%.

 

(a) Calculate the weighted average cost of capital (WACC) for this company.

 

(b) State the two conditions under which you could use the WACC you calculated in Part as the discount rate when performing a net present value analysis. 

 

(c) Briefly explain the relationship between WACC and company value.