Part B Stylish Furniture is considering a proposal to manufacture and sell a new line of products aimed at the home office market. When the firm first began to use discounted cash flows method for capital budgeting decisions in 1980s, a 10% discount rate was used. In the early 2000s, interest rates had fallen considerably and the company seemed to be rejecting some profitable projects because the hurdle rate was too high, so they lowered the discount rate to 9%. The following information is made available to you: Type of capital Per cent of book value (%) Per cent of market value (%) Bond 1 18 15 Bond 2 20 20 Preference shares 20 10 Ordinary shares Not available Retained earnings 37 Not available Total common equity 55 4 Stylish has two outstanding bond issues. Bond I matures in six years, has a par value of RM1,000, has a coupon rate of 7% paid semi-annually, and now sells for RM1,031. Bond 2 matures in sixteen years, has a par value of RM 1,000, has a coupon rate of 8% paid semi- annually, and now sells for RM1,035. The preference shares have a par value of RM50, pays a dividend of RM1.50, and has a current market value of RM19. The ordinary share sells for RM35 per share and recently paid a dividend of RM2.50. Dividends are expected to grow at an annual average of 6% for the foreseeable future. The one-year Treasury bill rate is 3%, the expected rate of return on the market portfolio is 12%, Stylish's beta is 1.2, and is subject to 30% tax rate. Required: You are recently hired by the company to relook at the company's discount rate. Based on the given information: a) Should you use book value or market value for the computation of the company's weightage average cost of capital? Why? (3 marks) b) Using the basis that you have chosen in (a) above, calculate the weighted average cost of capital for Stylish. (12 marks) (Total: 25 marks)