Question $1$

CSL is one of the largest and fastest$-$growing protein$-$based biotechnology businesses. They are

developing a new influenza vaccine for use during the summer months when patients get sick

from too much air conditioning. The following information comes from the company$$s balance

sheet:

Debentures $($$$100$ par, $6\mathrm{.}5\%$ annual coupon$)$ $$70,000,000$

Preference shares $($$$120\mathrm{.}50$ par, $10\mathrm{.}5\%$ cumulative$)$ $$20,500,000$

Ordinary shares $($$$20$ issue price$)$ $$65,000,000$

Retained earnings $$30,500,000$

CSL has also collected the following information:

$$ The preference shares are trading on the market at $$120\mathrm{.}50$ today, and a dividend has just

been paid.

$$ An interest payment in relation to the debentures has just been made, and they mature six

years from today. The market rate of interest on the debentures is $9\mathrm{.}2\%$ p$.$a$.,$ compounding

annually.

$$ Forecasts of the expected risk$-$free rate of return $=2\mathrm{.}67\%$ p$.$a$.$ and expected return on the

market portfolio $=11\mathrm{.}34\%$ p$.$a$.$

$$ The systematic risk of CSL$$s ordinary shares is the same as the market portfolio$$s system$-$

atic risk. These shares are currently trading at $$253.$

Calculate the company cost of capital for CSL that they could then use to evaluate this project.

CSL is not required to pay any corporate taxes as this is a special R&D project. $($ans: $11\mathrm{.}18\%)$