Question 4 WACC 14 marks The following information relates to Christinas Crystal Ltd: Ordinary Shares: 375,000 shares on issue selling for $25 per share. The beta for the company's shares is 0.90 and the next dividend will be $2.20 per share. Dividends are expected to grow at a constant 5.5% p.a. Preference Shares: 160,000, 10% preference shares on issue, with a book value of $50 per share and are currently selling for $48 per share. Debt: 200,000 bonds with 7 years to maturity that were issued with a face value of $100 each, paying annual coupon amounts of 8% and are currently selling for 95% of par value. The current interest rate (yield) for 7-year bonds of similar risk is 9% p.a. Market Data: Market risk-premium is 7% and the federal government bond rate is 6%. Required: (Marks are awarded for workings, so please show all workings). A. Calculate the firm's weighted average cost of capital (WACC)? (8 marks) B. The firm has multiple divisions and are looking at using the WACC calculated above for a new project being considered by the division with the least amount of risk. I. Is it appropriate to use the WACC calculated in part A? Please provide reasons. (2 marks) II. What simple approach could the firm use to come up with a risk adjusted required return? (1 mark) C. Bond yields are impacted by several types of risk. From the two scenarios below, identify the risk by name and advise how it would impact upon Christinas cost of debt and in turn WACC? I. Christinas Crystals Ltd new bond issue will have a lower bond rating than the current bonds on issue. II. The Reserve Bank of Australia increases interest rates. (3 marks)

Question 4 - WACC - 14 marks The following information relates to Christina's Crystal Ltd: Ordinary Shares: 375,000 shares on issue selling for $25 per share. The beta for the company's shares is 0.90 and the next dividend will be $2.20 per share. Dividends are expected to grow at a constant 5.5% p.a. Preference Shares: 160,000, 10% preference shares on issue, with a book value of $50 per share and are currently selling for $48 per share. Debt: 200,000 bonds with 7 years to maturity that were issued with a face value of $100 each, paying annual coupon amounts of 8% and are currently selling for 95% of par value. The current interest rate (yield) for 7-year bonds of similar risk is 9% p.a. Market Data: Market risk-premium is 7% and the federal government bond rate is 6%. Required: (Marks are awarded for workings, so please show all workings). A. Calculate the firm's weighted average cost of capital (WACC)? (8 marks) B. The firm has multiple divisions and are looking at using the WACC calculated above for a new project being considered by the division with the least amount of risk. I. Is it appropriate to use the WACC calculated in part A? Please provide reasons. (2 marks) II. What simple approach could the firm use to come up with a risk adjusted required return? (1 mark) c. Bond yields are impacted by several types of risk. From the two scenarios below, identify the risk by name and advise how it would impact upon Christina's cost of debt and in turn WACC? 1. Christina's Crystals Ltd new bond issue will have a lower bond rating than the current bonds on issue. II. The Reserve Bank of Australia increases interest rates. (3 marks) Question 4 - WACC - 14 marks The following information relates to Christina's Crystal Ltd: Ordinary Shares: 375,000 shares on issue selling for $25 per share. The beta for the company's shares is 0.90 and the next dividend will be $2.20 per share. Dividends are expected to grow at a constant 5.5% p.a. Preference Shares: 160,000, 10% preference shares on issue, with a book value of $50 per share and are currently selling for $48 per share. Debt: 200,000 bonds with 7 years to maturity that were issued with a face value of $100 each, paying annual coupon amounts of 8% and are currently selling for 95% of par value. The current interest rate (yield) for 7-year bonds of similar risk is 9% p.a. Market Data: Market risk-premium is 7% and the federal government bond rate is 6%. Required: (Marks are awarded for workings, so please show all workings). A. Calculate the firm's weighted average cost of capital (WACC)? (8 marks) B. The firm has multiple divisions and are looking at using the WACC calculated above for a new project being considered by the division with the least amount of risk. I. Is it appropriate to use the WACC calculated in part A? Please provide reasons. (2 marks) II. What simple approach could the firm use to come up with a risk adjusted required return? (1 mark) c. Bond yields are impacted by several types of risk. From the two scenarios below, identify the risk by name and advise how it would impact upon Christina's cost of debt and in turn WACC? 1. Christina's Crystals Ltd new bond issue will have a lower bond rating than the current bonds on issue. II. The Reserve Bank of Australia increases interest rates