Global plc is a conglomerate and it is considering a new investment in one its

subsidiary business units (SBU). The board of directors of Global Plc has asked you,

as the financial director of the company, to provide the required rate of return that the

future cash flows of the new investment should be discounted at. The following

information is extracted from the most recent Balance Sheet of the firm.

Long-term Liabilities: Book Value ($)

Bank Loan @ 10% 2,000,000

Shareholders Equity & Capital:

Ordinary Shares ($2 per share) 2,800,000

Retained Earnings 860,000

Ordinary share price of Global is currently $2.60 in the stock market

Bank loan is non-tradable and equity and retained earnings have the same cost

The average risk premium of the S&P/TSX index for the past ten years is 5

percent and the Global's systematic risk during the same period is 1.3

The yield on government bonds is currently 4%

It is expected that the new investment has the same risk as the average risk of

the current projects of the firm

Corporate tax is 30%

a) Estimate the weighted average cost of capital (WACC) of the firm.

b) The finance officer of the abovementioned SBU reports that the bank is ready

to finance 90% of the funds necessary for the new investment at the same cost

as the current liabilities of the firm and suggest that the discount rate for the

new project should be adjusted accordingly. What is your response? Explain

you answer.