Minute Ltd. is a retailer of luxury watches, but the luxury watch market has been doing poorly of late. So Minute Ltd. is considering setting up a separate division to venture into the pastry retailing market, the stronghold of PastryChat Ltd., which has a weighted average cost of capital of 6%. Minute Ltd. issued 600,000 20-year, 12% semi-annual coupon bonds five years ago and these are currently trading at a premium of 10% to their $1,000 face value. Further, Minute Ltd.s 425 million shares that are currently trading at $0.80 each have a beta of 0.75. The risk-free rate is 1.5% and the expected return on the market is 14.5%. The marginal corporate tax rate is 20%.

(a) Calculate Minute Ltd.s cost of equity.

(b) Calculate Minute Ltd.s cost of debt.

(c) Calculate Minute, Ltd.s weighted average cost of capital and decide on a discount rate to be used by Minute Ltd. to assess its pastry retailing venture.

Specify two (2) important considerations in making your decision.

(d) A credible newspaper reports that a Minute Ltd.s store manager has stolen luxury watches amounting to half a million dollars. How will this affect its cost of

equity?

(e) Minute Ltd. plans to issue some convertible bonds and use the proceeds to pay off some of its straight bonds. How will this affect its WACC?