# Weighted Average Cost Of Capital Questions

Question 1:

The return on the stock market as a whole is currently 9.3%. Short dated Treasury bills are currently yielding 4.12%. The Beta factor applied to returns from companies involved in the sector in which the company is considering investment projects is 1.28.

Applying the Capital Asset Pricing Model (CAPM) determine the rate of return that would be required for an investment project to be acceptable.

Question 2: Optimum PLS is a quoted company. It has 3 classes of quoted security:

a) Â£1,200,000 nominal value of ordinary shares at 25 pence per share. The market value of the shares is 139 pence. A dividend of 4 pence per share has just been paid. Dividends are expected to grow by 7% per annum for the foreseeable future.

b) Â£1,680,000 12% preference shares of Â£1, with a market value of 98 pence per share.

c) Â£2,800,000 of irredeemable debentures with a market value of Â£92 per Â£100 of debentures. The debentures have an interest rate of 8% of the nominal value.

Calculate the weighted average cost of capital (wacc) given the above capital structure.

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#### Solution Preview

See the attached file. Thanks

The return on the stock market as a whole is currently 9.3%. Short dated Treasury bills are currently yielding 4.12%. The Beta factor applied to returns from companies involved in the sector in which the company is considering investment projects is 1.28.

Applying the Capital Asset Pricing Model (CAPM) determine the rate of return that would be required for an investment project to be acceptable.

Ri=Rf+B*(Rm-Rf)

Rf=Risk free ...

#### Solution Summary

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