INSTRUCTIONS: This question contains two (2) parts. Answer all parts of the questions. For example: Part a): Your response...

(a) Using a corporate tax rate of 30%, calculate Spywares after tax WACC based on the following information.

Spyware Ltd is financed through debt and equity. Currently, a Spyware share sells for $10.50 and 1 million of these shares have been issued. Analysis indicates that the appropriate Beta for a Spyware share is 1.5. Further, the risk-free rate is 5% p.a. and the expected market return is 12% p.a. Spyware has also issued 1 million of redeemable preference shares with a current price of $5. The redeemable preference share pays a perpetual dividend of $0.20 annually. Spyware has also issued 100,000 bonds. Each of these bonds has a face value of $100, four years to maturity, pay an annual coupon of 6% and currently trade for $94.

(b) Given your answer to (b), outline whether Spyware is justified in using a 13% discount rate to value all investment proposals.