QUESTION 4 (a) Suppose a company uses only debt and internal equity to finance its capital budget and uses CAPM to compute its cost of equity. The Company estimates that its WACC is 12%. The capital structure is 75% debt and 25% internal equity. Before tax cost of debt is 12.5 % and tax rate is 20%. Risk-free rate is RF = 6% and market risk premium (rm - RF ) = 8%: What is the beta of the company? (6 marks) (b) Company A is funded as follows: Balance Sheet Extract Ordinary Shares (50n) 2000 12% Loan Notes 1500 8% Preference Shares (K1) 500 Bank Loan 750 Details on these are as follows. The company has an equity beta of 1.2. Government bonds are currently trading at 6% and the average market risk premium is 7%. The Loan notes are currently trading at K106 and are redeemable at par in 5 years time. The preference shares are trading at 92n. The bank loan has an interest rate of 10%. The current share price is K1.25. The tax rate is 30%. Calculate the Weighted Average Cost of Capital. (14 marks) (Total: 20 marks)