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The directors of M Co are considering opening a new factory tomanufacture a new product at a cost of $3.0 million. During the last

 

The directors of M Co are considering opening a new factory tomanufacture a new product at a cost of $3.0 million. During the last 5years, the company has had 3 million shares in issue. The current marketprice of these shares (at 31 December 20X8) is $1.45 ex-dividend. The company pays only one dividend each year (on 31 December) and dividends for the last five years have been as follows: Year 20X8 20X7 20X6 20X5 20X4 Dividend per share (cents) 14.1 14.1 12.1 11.6 11.0 M Co currently has in issue $1 million 7% debentures redeemable on31 December 20Y2 at par. The current market price of these debentures is$83.60 ex-interest, and the interest is payable in one amount each yearon 31 December. The company also has outstanding a $500,000 bank loanrepayable on 31 December 2017. The rate of interest on this loan isvariable, being fixed at 3% above the bank's base rate which is currently 5%. Required: (a) Calculate the weighted average cost of capital (WACC) for M Co as at 31 December 20X8 (15 marks) (b) Explain the terms business riskand financial risk and the significance of each in using an existingWACC to appraise a future project. (7 marks) (c) Briefly advise the directors of MCo on the suitability of using the WACC calculated in (a) above todiscount the expected cash flows of the project

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a Weight ed average cost of capital W ACC for M Co as at 31 December 20 X 8 The W ACC for M Co as at 31 December 20 X 8 can be calculated using the fo... blur-text-image

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