1. John plc has 10 million shares outstanding and the current share price is £4. These ordinary shares have a beta of 1.

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1. John plc has 10 million shares outstanding and the current
share price is £4. These ordinary shares have a beta of 1.2. The
risk-free rate on government bonds is 5% and the expected rate of
return on the market portfolio is 15%. The market value of its debt
amounts to £10m and costs 12% per year before allowing for tax
shield benefits. The corporation tax rate is 30%. What is the
firm’s WACC?
2. Pelamed
Pharmaceuticals has EBIT of $325 million in 2015. In addition,
Pelamed has interest expenses of $125 million and a corporate tax
rate of 40 percent.
3. “ If I use the after-tax cost of debt for my project analysis
then I should use the after-tax cost of equity as well”. Do you
agree with this statement? Explain
4. Celebrity plc. has a target debt-equity ratio of 0.8. Its
WACC is 10.5% and the tax rate is 35 per cent
(a) If the firm’s cost of equity is 15 per cent what is its
pre-tax cost of debt?
(b) If instead you know that the after-tax cost of debt is 6.4
per cent, what is the cost of equity?