Jabali Ltd. is a quoted company which is financed by 10,000,000 ordinary shares and Sh.50,000,000 of irredeemable 8% debentures. The market value of the shares is...

Jabali Ltd. is a quoted company which is financed by 10,000,000 ordinary shares and Sh.50,000,000 of
irredeemable 8% debentures. The market value of the shares is Sh.20 each ex-div and an annual dividend of
Sh.4 per share is expected to be paid in perpetuity. The debentures are considered to be risk-free and are
valued at par.
Mr. Jabali the managing director of the company is wondering whether to invest in a project which cost
Sh.20 million and yield Sh.3.8 million a year before tax in perpetuity. The project has an estimated beta value
of 1.25. The return from a well-diversified market portfolio is 16%.
Required:
a) The weighted average cost of capital of the company.
b) The beta of the company.
c) The beta of an equivalent ungeared company ignoring taxes.
d) Advise the company whether/or not the project should be accepted. In your explanation, highlight
the significance of your calculations in (a), (b) and (c) above.

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Kavungya answered the question on April 16, 2021 at 14:09

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