You have been asked to estimate the weighted average cost of capital (WACC) for the PC Co, a listed company, manufactures telecommunication equipment. To do so, you obtain the following data for PC Co.

• An investor buying PC bond now and planning to keep it until maturity can expect to receive from PC $50 every year for the next five years plus $1000 at the end of the fifth year,
• Number of year is 5
• Bond price is 978.65
• Balance sheet of PC indicates that the firms book value of debt is 800 million (0.8m bonds at par value of $1000) and the share outstanding is 200 million
• The stock market price of one PC share is $15.97
• Tax rate is 21%
• Pcs equity beta is 1.1 and the expected market risk premium over the 10-year government bond rate is 5%
• The risk free rate is 3.5%

Required:

1. Estimate cost of debt and equity. (3Marks)
2. Estimate the weighted average cost of capital (WACC) for the PC Co. (3Marks)
3. You have just received a copy of a consultants report that strongly recommends that investment proposals be accepted only if their IRR is higher than 8%. Do you agree with the consultants estimate? (2Marks)
4. State clearly any limitations and assumptions that you made in your calculations. (2 marks)