Gobin plc is a furniture manufacturer in the located in Scotland and trading on the London Stock Exchange. The firm has a beta of 1.2. The historical rate of return on the FTSE All-Share index (i.e., the market portfolio) is 14% and the risk-free rate of return in the United Kingdom is currently at 6%. Managers at Gobin plc are planning to issue corporate bonds with a rate of 7.20%. The market value of the bonds is 250 million and the bonds will be issued at par. Gobins stock, of which 25 million shares are outstanding, sells for 30 per share. The UK corporate tax rate is 10%.

(a) Calculate (i) Gobins cost of equity, and (ii) after-tax weighted average cost of capital (WACC)

(b) Managers at Gobin plc must decide whether or not to purchase additional capital equipment. The cost of the equipment is 9 million to be paid upfront (today). The expected after-tax cash flows from the new equipment are 3 million a year for the first 4 years, 0.5 million in the fifth year, 0 million in the sixth year and 0.1 million a year for the 10 years that follow (i.e., from year 7 to year 16). The salvage value of this equipment is zero. Assume that all after-tax cash flows occur at the end of the year. You are required to (i) demonstrate by calculation, whether Gobin plc should purchase the new equipment, and (ii) briefly explain how an increase in the UK corporate tax rate from 10% to 30% might impact on the suitability of the project.