Ladybirds Ltd (Ladybirds) is considering the purchase of a new equipment for its manufacturing plant and has asked you to work out an appropriate discount rate to use when evaluating the project. Information about Ladybirdss current capital structure is as follows: Source of capital Market value Debts $1,600,000 Ordinary share capital $3,000,000 Total $4,600,000 To finance the purchase, Ladybirds can sell 10 year-bonds paying annual coupon interest at a rate of 6%. The bond can be sold at par. Ordinary shares of Ladybirds are currently selling at $20. The company will pay a dividend of $2.00 next year and dividends are expected to grow by an average of 2% per year for the indefinite future. The current companys tax rate is 30%. Required a) Determine the capital structure of Ladybirds. [2 marks] b) What is the after-tax cost for each source of capital (debt and ordinary shares)? [3 marks] c) If the appropriate discount rate for the project is the firms cost of capital, determine the discount rate to be used for evaluating the project considered by Ladybirds. [1 mark] d) Instead of using the dividend cash flow approach used to answer question (b), your manager asks you to use the Capital Asset Pricing Model approach to value the cost of ordinary shares. What is the firms cost of capital for Ladybirds under this method, if the risk-free rate is 1.5%, the average market return is 9.5% and Ladybirds ordinary share has a beta of 0.75? [2 marks] e) Compare your answers in question (c) and (d). Which discount rate do you think Ladybirds should use for evaluating the project? Justify your answer. [2 marks]