Answer Happy

The Chief Finance Officer (CFO) of Adelpha Ltd, a UK-based manufacturer of small consumer goods, asks you to provide a report for the board concering a new product line. The new line has a lifespan of 10 years, and the CFO hopes that it will contribute substantially to strengthening the firm's balance sheet Currently, Adelpha has assets worth £40m. The table below sets out the known details of the firm's balance sheet: Value Cost of capital £40m 12% Debt £30m Equity ? Total assets 6% £10m 3% 7% The market data available are as follows: The risk-free rate of return The average return on the market index The investment project's data are as follows: The project's investment cost The tangible part of the investment (equipment) Annual depreciation of equipment The expected resale value of equipment in year 10 f30m £20m £2m £4m £25m £5m New equity issued New debt issued The annual revenue flow year I through 10 The annual cost year I through 10 The beta-risk of the project The beta-risk of total debt after the issue £6.5m £1.5m 1.5 0.4 Your report should address the following questions: c) What is the new cost of capital for the company after the investment? (10 marks) d) What is the cost of equity capital before and after the investment? (15 marks)