1. When considering a purchase of a new machine for her business, Indira wants to calculate the Weighted Average Cost of Capital (WACC) for her current operations.

Her long terms borrowings make up 40% of the businesss capital. The applicable interest rate paid for this is 8% per annum. The current tax rate that the business pays is 30%.

Although her business is not listed she has researched similar business and has calculated that the Beta for these (and her own) is 0.7. Through research she has also found that the Market Risk Premium is 4% and the Government Bond Rate (risk free rate) is 3%.

1. Calculate the cost of Debt Capital for the business (allow for the tax deductibility of the debt). (1 mark)

2. Assuming that her business has only ordinary shares, calculate the cost of Equity Capital for the business. (1 mark)

3. With your answers in a. and b. calculate the current WACC for Indiras business that should be used when considering new purchases of equipment. (1 marks)