Question:Tailoka is a large company with gearing debt to equity ratio by market values of 1:2.The company...

Tailoka is a large company with gearing debt to equity ratio by market values of 1:2.The companys profit after tax in the most recent year were K2,700,000 of which K1,070,000 was distributed as ordinary dividends. The Company has 5 million issued ordinary shares which are currently trading on the LUSE at K3.21.Corporate tax rate is 35% and corporate debt is risk free.Tailoka would want to undertake a new capital project. The project is a major diversification into a new industry. You have been tasked to provide estimates of the discount rate to be used in evaluating this new investment. You have been given the following information showing estimates for the next five years. Growth rate of own company earnings12%Average Equity Beta coefficient1.5Average industry gearing (debt to equity) ratio1:3 by market valueAverage payout ratio55%Stock market total return on equity16%Growth rate of own company dividends11%Growth rate of own company sales13%Treasury bills12%Own company dividend yield7%Own company geared equity beta1.4Own company share price rise14%

Required (a) Calculate the companys weighted Average Cost of Capital (WACC) using the Capital Asset Pricing Model (CAPM). (5 Marks) (b) Calculate the companys weighted Average Cost of Capital (WACC) using the dividend valuation model (5 Marks) (c) Describe the situations under which the above two models will produce same values for WACC (3 Marks) (d) Discuss any five (5) practical problems of using CAPM in investment appraisal.|(5 Marks) (e) Prepare a brief report recommending which discount rate you should use for this investment.Information from pars (a),(b) and (c ) above may be useful. (12 Marks)