Jabali Ltd. is a quoted company which is financed by 10,000,000 ordinary shares 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. (5 marks) b) The beta of the company. (4 marks) c) The beta of an equivalent ungeared company ignoring taxes. (4 marks) 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. (7 marks) (Total: 20 marks)
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