Question

Handley Ltd is a firm that up until now has been involved in the manufacturing of plastic bottles used by milk distributors. It is considering pivoting towards producing wifi-enabled lighting systems and wants your help to estimate its after-tax weighted average cost of capital in order to assess the viability of this strategy. Handley Ltd currently have a debt-to-equity ratio of 0.6. They also have two sources of debt, commercial bills and long-term bonds, which, in aggregate, are each equivalent in market value to each other. The current yield on the commercial bills is 3.7% p.a. and the yield on the bonds is 4.1% p.a. The risk-free interest rate is estimated to be 3% p.a., the market risk premium 5.5% p.a. and the current beta of Handley Ltd shares is 0.7. The relevant corporate tax rate is 30%. 15. In a world with corporate taxes, the market value of a firm's assets can increase through the introduction of debt into the firm's capital structure. In no more than 6 lines, comment on this statement