Version:0.9 StartHTML:0000000105 EndHTML:0000002778 StartFragment:0000000141 EndFragment:0000002738

bottles used by milk distributors. It is considering pivoting towards producing wifi-enabled

lighting systems and wants your help to estimate its after-tax weighted average cost of

capital in order to assess the viability of this strategy.

Handley Ltd currently have a debt-to-equity ratio of 0.6. They also have two sources of

debt, commercial bills and long-term bonds, which, in aggregate, are each equivalent in

market value to each other. The current yield on the commercial bills is 3.7% p.a. and the

yield on the bonds is 4.1% p.a. The risk-free interest rate is estimated to be 3% p.a., the

market risk premium 5.5% p.a. and the current beta of Handley Ltd shares is 0.7. The

relevant corporate tax rate is 30%.

13. Estimate the after-tax WACC of Handley Ltd (in percentage terms to two decimal

places e.g. 10.03%)

[9 marks]

14. In no more than 3 lines explain whether it is appropriate for the company to use its

WACC as a benchmark rate in assessing this new project.

This is more clear

Questions 13 and 14 rely on the following information Handley Ltd is a firm that up until now has been involved in the manufacturing of plastic bottles used by milk distributors. It is considering pivoting towards producing wifi-enabled lighting systems and wants your help to estimate its after-tax weighted average cost of capital in order to assess the viability of this strategy. Handley Ltd currently have a debt-to-equity ratio of 0.6. They also have two sources of debt, commercial bills and long-term bonds, which, in aggregate, are each equivalent in market value to each other. The current yield on the commercial bills is 3.7% p.a. and the yield on the bonds is 4.1% p.a. The risk-free interest rate is estimated to be 3% p.a., the market risk premium 5.5% p.a. and the current beta of Handley Ltd shares is 0.7. The relevant corporate tax rate is 30%. 13. Estimate the after-tax WACC of Handley Ltd (in percentage terms to two decimal places e.g. 10.03%) [9 marks) 14. In no more than 3 lines explain whether it is appropriate for the company to use its WACC as a benchmark rate in assessing this new project