Cost of capital Makhado Limited has a target capital structure of 60% equity and 40% debt. The before-tax cost of debt is 7.64% and the cost of new equity is 13%. The finance manager is currently considering a project with an expected return of 12% which will be financed from the issue of ordinary shares as all retained income is already budgeted for in more profitable projects. The company recently issued debentures and, as a result, the present capital is more heavily weighted towards debt.

The company tax rate is 28%

2.1 Calculate the weighted average cost of capital by making use of target capital structure.

2.2 Briefly explain (giving reasons) whether the project under consideration should be accepted or not.

2.3 List the three steps used to calculate the weighted average cost of capital.

2.4 Outline the fundamental assumptions of weighted average cost of capital.