Question 5

Environ4Us Ltd has the following capital structure.

Value Cost of funds

Debt 120,000,000 3.5%

Equity 180,000,000 11.0%

(a)Calculate the weighted average cost of capital for Environ4Us Ltd.

Environ4Us Ltd is planning to restructure. This will involve buying back $100,000,000 worth of shares and selling $100,000,000 worth of bonds (debt).

(b)Calculate the weighted average cost of capital for Environ4Us Ltd after the firm has changed their capital structure.

(c)State what has happened to the weighted average cost of capital with the restructure and why.

(d)What impact will this have on the net present value of the future cash flows for any project Environ4US Ltd undertakes?