The Salima company is in the fast foods industry. The following is the companys balance sheet for the year ended 31 March 1995:

Assets	Sh.000	Liabilities and owners equity	Sh.000
Current Assets Net fixed assets	65,000 85,000 ______ 150,000	Current liabilities 16% Debentures (Sh.1,000 par) 15% Preference shares Ordinary shares (Sh.10 par) Retained profits	25,000 31,250 12,500 25,000 56,250 150,000

Additional information:

1. The debenture issue was floated 10 years ago and will be due in the year 2005. A similar debenture issue would today be floated at Sh.950 net.

2. Last December the company declared an interim dividend of Sh.2.50 and has now declared a final dividend of Sh.3.00 per share. The company has a policy of 10% dividend growth rate which it hopes to maintain into the foreseeable future. Currently the companys shares are trading at Sh.75 per share in the local stock exchange.

3. A recent study of similar companies in the fast foods industry disclose their average beta as 1.1.

4. There has not been any significant change in the price of preference shares since they were floated in mid 1990.

5. Treasury Bills are currently paying 12% interest per annum and the company is in the 40% marginal tax rate.

6. The inflation rate for the current year has been estimated to average 8%.

Required:

(a) Determine the real rate of return. (2 marks)

(b) What is the minimum rate of return investors in the fast foods industry may expect to earn on their investment? Show your workings. (7 marks)

(c) Calculate Salinas overall cost of capital. (6 marks)

(d) Discuss the limitations of using a firms overall cost of capital as an investment discount rate. (6 marks)