You should assume that the current date is $31$st March $20$X$3.$

Heaven Home plc $(HH)$ is a company that owns a number of holiday centers in the neighbor city.

To date, its directors have used the payback method to appraise investment opportunities. However, they are now considering a number of large$-$scale investments and wish to use the NPV approach instead. HH$\text{'}$s directors are proposing to use a cost of capital of $5\mathrm{.}5\%$ per year in their NPV calculations on the basis that this represents the average cost of HH$\text{'}$S preference shares and debentures $($i$.$e$.,\frac{7\%+4\%}{2}.$

The company's long$-$term capital comprises the following:

$\backslash$table$[[,$Total nominal value,Market value $($each$)],[$Ordinary shares with par value of $0\mathrm{.}50,13\mathrm{.}5$ million,$4\mathrm{.}80($cum div$)],[7\%$ preference shares with par value of $1,2\mathrm{.}8$ million,$1\mathrm{.}18($ex div$)],[4\%$ debentures with par value of $100,4\mathrm{.}6$ million,$97($cum interest$)]]$

Notes:

The next dividend of $6\mathrm{.}48$ million for the ordinary shares will be paid very shortly. The dividends for ordinary shares have been growing at a rate of $6\%$ per year for a number of years.

The debentures will mature in three years' time $($i$.$e$.,31$ March $20$X$6).$

The corporate tax rate is $17\%$ per year for the foreseeable future.

Requirements:

a$)$ Calculate the yield to maturity $($YTM$)$ of HH$\text{'}$s debenture at $31$ March $20x3(7$ marks$).$

b$)$ Calculate HH$\text{'}$s WACC at $31$ March $20$X$3.(13$ marks$)$

c$)$ Explain to HH$\text{'}$s directors why they should not use the proposed cost of $5\mathrm{.}5\%$ in the NPV calculation. $(10$ marks$)$