Omega Building Group plc is financed through bonds and ordinary shares. The bonds were issued five years ago at a par value of 100 (total funds raised 5m). They carry an annual coupon of 10 per cent, are due to be redeemed in four years and are currently trading at 105.

The companys shares have a market value of 4m, the return on risk-free government securities is 8 per cent and the risk premium for an average-risk share has been 5 percent. Omega Building Groups shares have a lower than average risk and its historic beta as measured by the co-movement of its shares and the market index correctly reflects the risk adjustment necessary to the average risk premium this is 0.85. The corporate tax rate is 30 per cent. Omega Building Group plc has a net asset figure of 3.5m showing on its balance sheet.

Calculate the cost of debt capital. Calculate the cost of equity capital. Calculate the weighted average cost of capital (WACC). Discuss briefly whether Omega Building Group plc should use the WACC for all future projects and Strategic Business Units. Discuss how capital structure influences a companys cost of capital.