The following information applies to ATO Inc.:

Number of ordinary shares : 30 million

Irredeemable debentures at 12% (book value) : 58 million

Bank loan at 8% : 7 million

Market price of ordinary shares : 6 per share

Market value of debentures : 120 per 100 debenture

Dividends (recently paid) : 15p per share

Dividend growth rate : 4% in the foreseeable future

Tax rate : 30%

Required:

a. Compute the companys cost of equity.

b. Compute the companys after-tax cost of the two debt components.

c. Compute the companys weighted average cost of capital (WACC).

d. Discuss three situations when the WACC may be used to assess the

companys project.

e. The company used the WACC to appraise a project when the required return is higher. Discuss the impact of this on shareholder value.