Question

Amcor Limited, a packaging company just issued preference shares, bonds and ordinary shares to finance its capital expenditures. Amcor issued 100,000 preference shares at a price of $75 per share. The estimated flotation cost is $5 per share. The company intends to pay a preference dividend of $8 per share. In addition, Amcor has issued three bonds with the following characteristics:

Bond	Coupon	Book Value $Million	Market Value $Million	Yield to Maturity
1	6.55%	500	550	6.50%
2	7.25%	485	420	7.30%
3	7.65%	200	250	6.20%

Also, Amcor has issued 80 million ordinary shares with a book value of $38 per share and a market price of $50 per share. Amcor has an estimated beta of 0.95. The current yield on Treasury Bills is 5%, and the market return is 12%.

The corporate tax rate is 30%.

Required:

(i) Calculate the weighted average cost of capital. (

(ii) Amcor has decided to invest in the mining exploration business. Provide two reasons why the weighted average cost of capital computed in (i) above might not be appropriate for the new project.

Answer 1