Lincoln plc is looking to take advantage of the expected improvement in economic conditions and invest in a major new project. The company needs to determine a suitable discount rate in order to calculate the project’s net present value. Although the project is in a different industrial sector and is very different in nature to the company’s current activities it has been agreed that the company’s existing weighted average cost of capital (WACC) should be calculated as a starting point.
The following financial data is currently available for Lincoln plc.
Issued share capital: 10 million, £1 par value ordinary shares trading at £1.25 each on the stock exchange. The most recent dividend paid was 8p per share and dividends have grown at 5% per annum in recent years.
Debt capital: 60,000 irredeemable debentures each with a nominal value of £100 and paying a coupon rate of 6%. Each debenture trades at £80 on the stock exchange.
Corporation tax is 25%