WBC is currently financed using debt and equity with a targeted debt to equity ratio of one (D/E = 1). Its debt financing is from three sources, overdraft, bank bills and debentures, with the ratio of overdraft to bank bills to debentures of 1:2:3. Its equity is ordinary shares. These ratios represent the long-term capital structure target for WBC.

The debenture pays an annual coupon of 12 per cent per annum on its $1,000 face value. The remaining term of the debenture is six years. The debenture is currently priced $922.23.

The bank bills issued by WBC are ninety-day bills, with a face value of $100,000 and are currently priced at $97,593.58.

The bank overdraft rate is 1 per cent per annum above the bank bill rate.

The ordinary shares sell for $8.00. The projected dividend for year one is $1.10. Dividends are expected to grow at 6 per cent per annum indefinitely.

Required

Calculate the Weighted Average Cost of Capital (WACC) for WBC, assuming a tax rate of 30 per cent. Hint: this requires a calculation of the effective annual cost for each source of finance.

Discuss whether the WACC could be used in the above project evaluation, and if so how. Include a discussion of any restrictions that apply to the use of WACC?