Syndicate Ltd. is re-evaluating the rate of return demanded by its investors for new projects with the following projects being reviewed by the board for possible investment:

Investment	Investment Cost ($)	Rate of Return (%)
A	1,500,000	15
B	2,000,000	12
C	5,000,000	9
D	750,000	6

The latest balance sheet for Syndicate Ltd shows:

Long Term Debt Book Value ($)

Bonds: Issued at par: $100 5,000,000

Annual coupon of 6%

4 years to maturity

Equity

Preference Shares: 1,000,000

100,000 shares issued

Ordinary Shares: 4,000,000

1,000,000 shares issued

The companys bank has advised that the interest rate on any new debt finance provided for new projects would be 8% p.a.

The companys preference shares currently sell for $9.35 each and pay a dividend of $1.10 per share.

The companys existing ordinary shares sell for $4.15 each and pay a dividend per share of 55 cents, which has just been paid to shareholders. Historically, dividends have increased at an annual rate of 2% p.a. and are expected to continue to do so in the future.

Syndicates company tax rate is 30%.

1. Determine the market value proportions of debt, preference shares and ordinary equity comprising the companys capital structure. (6 marks)
2. Briefly detail why market values should be used to calculate the weighted cost of capital (2 marks)
3. Calculate the after-tax costs of capital for each source of finance. (3 marks)
4. Determine the after-tax weighted average cost of capital for the company. (2 marks)
5. Determine which investments should be made. (2 marks)