You are given the following information concerning Coca Cola Enterprises:

Debt: two thousand 7% coupon bonds outstanding, at $1,000 face value, with twenty years to maturity and selling for 93% of par. These bonds pay interest half-yearly. It is also given that the annual YTM, RD = 7.70%.

Ordinary shares: 80,000 ordinary shares selling for $45 per share. The share has a beta of 1.2 and will pay a dividend of $3.25 next year. The dividend is expected to grow by 7% per year indefinitely.

Preference shares: seven thousand 6% preference shares selling at $93 per share.

Market: 12% expected return, a 4% risk-free rate and a 30% tax rate.

Required:

a. What is the company's after-tax WACC under the classical tax system? (9 marks)

b. Based on the answer from question (a), what would be the company's after-tax WACC under the imputation tax system? (Please assume that the preference and ordinary shares carry 100% franking credits at the 30% tax rate, and that all investors can fully utilise franking credits paid by the company.) (3 marks)

c. Based on the answer from question (a) and (b), state i) how the cost of capital has changed from under the classical tax system to the imputation tax system, and ii) why it is so. (3 marks)