The following financial information relates to the operations of Graeson$$s Boats Ltd$.$ Emmy Lou Ltd$.$ is

planning to expand its operations in the fishing industry and is viewing Graeson$$s Boats Ltd$.$ as a possible

acquisition.

The following figures have been extracted from Graeson$$s Boats Ltd accounts.

Statement of Financial Position

as at $30$ June $2015$

$$000$

Current assets $14,000$

Investments $11,000$

Non Current assets $20,000$

$45,000$

Current liabilities $($non$-$interest bearing$)11,700$

Debentures $11,300$

Reserves $9,000$

Share Capital $($Issued at $$1)13,000$

$45,000$

Additional information

i Government bonds are currently yielding $6\%$ per annum.

ii The current market return on equity is estimated to be $14\%$ per annum.

iii A merchant banker suggests that Graeson$$s Boats Ltd would have to offer a rate of $11\%$ p$.$a$.$ on any

new issue of $10$ year debentures.

iv The current $$1,000$ debentures have a coupon rate of $9\%,$ compounded semi$-$annually, with ten

years to maturity.

v The company tax rate is $30\%.$

vi Graeson$$s Boats Ltd shares have recently traded at $$4$ and the company's financial manager

believes that a beta of $1\mathrm{.}5$ is appropriate to the company.

a$)$ Estimate the cost of capital for Graeson$$s Boats Ltd$.$

b$)$ Explain what this rate means and identify the key factors which may influence its usefulness