Voltaire Industries Limited (VOL) is a large transportation company operating trucking networks in each of the major capital cities in Australia. It has been in business for more than 20 years. The CEO of VOL, Mr David Grayville, is considering diversifying the business into mining. Mr Grayville has asked you to calculate the companys cost of capital for use as a discount rate in evaluating the purchase of a copper mine in Western Australia. To assist you in this task you have been provided the following information: Extract from balance sheet Liabilities Debentures ($100 par, 8% p.a. semi-annual coupon) $5,000,000 Preference Shares ($1 par, 10% p.a. cumulative) $1,800,000 Owners equity Ordinary shares ($1 par) $15,000,000 Retained earnings $4,500,000

Additional information

1. An interest payment in relation to the debentures has just been made, and they mature in six years from today. The current yield on similar risk debentures in the marketplace is 5.50% p.a. 2. The preference shares are trading in the market at $1.60 and a dividend has just been paid. 3. Forecasts in relation to market returns are as follows: expected rate on 10-year Commonwealth Bonds = 4.25% p.a. compunded annually;

expected return on the market portfolio (including franking credits) = 12.0% p.a. compounded annually; and the systematic risk of VOL ordinary shares is the same as the market portfolios systematic risk.

4. The ordinary shares are trading on the market at $1.25 each.

5. The company tax rate is 30%.

6. VOL operates in an imputation tax system.

7. The ordinary share and preference share dividends are fully franked.

Required: (i) What is the after tax weighted average cost of capital (WACC) of Voltaire Industries Limited? (10 Marks)

(ii) Is the WACC calculated above appropriate for evaluating this project? Explain.