Question 14 Sally Sands Pty Ltd is considering a new project for its expansion and the CFO has asked you to work out an appropriate discount rate to use when evaluating this project. Information about Sally Sands's current capital structure is as follows:

Source of capital	Book value	Market value
Debts Ordinary share capital	$1,000,000 $1,400,000	$1,550,000 $2,450.000
Total	$2,400,000	$4000,000

To finance the purchase, Sally Sands can sell 5-year bonds paying annual coupons at a rate of 6.5% with a face value of $1,000. The bond is expected to be sold at $992 Ordinary shares are currently selling at $25.2. The company recently declared a dividend of $2.1 and this will be paid next year, which is expected to grow by an average of 4% per year for the indefinite future The current company's tax rate is 30%

Part A Describe the cash flow streams to service the bonds and shares of Sally Sands Part B Calculate the after-taxed cost of capital for each source of capital (debts and ordinary shares) Part C Calculate the weights of bonds and ordinary shares in the capital structure. Part D Assuming that the appropriate discount rate for the project is the firm's cost of capital. Determine the discount rate to be used for evaluating the targeted Part E Instead of using the dividend discount model (DDM) approach to calculate the cost of equity and WACC, your manager asks you to use the Capital Asset Pricing Model (CAPM) approach to value the cost of ordinary shares. What is Sally Sands's WACC under this method? Assume that the Treasury bond yield is 2.5%, the average market return is 9.5% and Sally Sands' ordinary share has a beta of 1.15. Part F Compare your answers to Part D and Part E. Which discount rate do you think Sally Sands should use for evaluating the project given that Sally Sands is currently investing in a portfolio of 6 different capital projects? Justify your answer.