Hose plc presently has a capital structure which is 30 per cent debt and 70 per cent equity. The cost of debt before tax shield benefits is 9 per cent and that for equity is 15 per cent. The firms future cash flows are expected to be a perpetuity of 750,000. The tax rate is 30 per cent.

a Calculate the WACC and the value of the firm.

b The directors are considering the partial replacement of equity finance with borrowings so that the borrowings make up 60 per cent of the total capital. Director A believes that the cost of equity capital will remain constant at 15 per cent; Director B believes that shareholders will demand a rate of return of 23.7 per cent; Director C believes that shareholders will demand a rate of return of 17 per cent and Director D believes the equity rate of return will shift to 28 per cent. Assuming that the cost of borrowings before income taxes remains at 9 per cent, what will the WACC and the value of the firm be under each of the directors estimates?