Hill Ltd and Park Ltd are companies that are identical except for funding. Both make an operating profit of £2.5m p.a. and both companies have a policy of paying out all residual profit as dividend. Hill Ltd has 3m ordinary shares with a market value of £6m, together with £7m 5% debentures listed at par. Park Ltd has 25m ordinary shares of 50p each with a market value of £12.5m.

Your client, Naema, holds 30,000 ordinary shares in Hill Ltd. This reflects her attitude towards risk.

Required:

a.Calculate the WACC for both Hill Ltd and Park Ltd;

b.Devise a strategy to increase Naema’s wealth whilst maintaining her income and risk position;

c.Demonstrate that your scheme maintains Naema’s financial risk position.