The company wants to maintain its existing capital structure policy of 50% debt, 10% preferred equity and 40% of common equity for this new investment.

Ms Helen has requested you to make a report based on the following queries so that she can present it in the next board meeting.

1. What will be the cost for each source of financing? Consider both DDM (i.e. Dividend Discount Model) and CAPM (i.e. Capital Asset Pricing Model) method for common equity. Provide your comments on the assumptions of each approach and their merits and limitations. (5 marks)

2. Determine the optimum cost of capital using the Weighted Average Cost of Capital (WACC) approach for target capital structure. (Hints: Ms Helen would prefer to use CAPM over DDM). (5 marks)

3. Evaluate the total value addition (i.e. total NPV) and breakeven rate (i.e. IRR) of this possible restructuring decision. (Hints: Use the WACC as your discount rate to evaluate the investment projects) (10 marks)

4. Assume that the product lifecycle of five years is viewed as a safe bet, but the scale of demand for the product is highly uncertain, mainly due to possible BREXIT. Analyse the sensitivity of the projected NPV to the unit sales and the cost of capital. (5 marks)

5. Explain how the BREXIT could affect the UK automobile manufacturing sector, and what are the possible strategic changes required in this industry to cope with the risk? (5 marks)