Diversified plc is trying to i

Diversified plc is trying to introduce an improved method of assessing investment projects using techniques. For this it has to obtain a to use as a discount rate. The finance department has assembled the following information:

– The company has an equity beta of 1.50, which may be taken as the appropriate adjustment to the average risk premium. The yield on risk-free government securities is 7 per cent and the historic premium above the risk-free rate is estimated at 5 per cent for shares.

– The market value of the firm’s equity is twice the value of its debt.

– The cost of borrowed money to the company is estimated at 12 per cent (before tax shield benefits).

– tax is 30 per cent.

Assume: No inflation.

Required

Estimate the equity using the (CAPM). Create an estimate of the weighted average (WACC).

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