XYZ Limited is quoted a company which is financed by 10 000 000 ordinary

shares and 50 000 000 of irredeemable 8% debentures. The market value of the

shares is she 20 each of dividend and an annual dividend of shs 4 per share is

expected to be paid in perpetuity. The debentures are considered to be risk tree

and one valued at par.

Mr Fadhili the managing director of the company is wondering whether to invest in

a project which cost shs 20 million and yield shs3.8 million a year before tax in

perpetuity. The project has and estimated beta value of 1.25. the return form a

well diversified market portfolio is 16%.

REQUIRED;

(a) The weighted average cost of capital of the company [5 marks]

(b) The beta of the company [5 marks]

(c) The beta of the equivalent angered company ignoring taxes [4 marks]

(d) Advise the company whether or not the project should be accepted in your explanation highlight t eh significance as your calculation in (a) (b) and (c) above. [6 marks]