Answer to Question #56755 in Other Management for Mueni

Question #56755
The following is the capital structure of XYZ Ltd as at 31/12/2002. Ordinary share capital Sh.10 par value Retained earnings 10% preference share capital Sh.20 par value 12% debenture Sh.100 par value Shs.M 400 200 100 200 900 Additional information 1. Corporate tax rate is 30% 2. Preference shares were issued 10 years ago and are still selling at par value MPS = Par value 3. The debenture has a 10 year maturity period. It is currently selling at Sh.90 in the market. 4. Currently the firm has been paying dividend per share of Sh.5. The DPS is expected to grow at 5% p.a. in future. The current MPS is Sh.40. Required a) Determine the WACC of the firm. b) Explain why market values and not book values are used to determine the weights. c) What are the weaknesses associated with WACC when used as the discounting rate, in project appraisal.
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