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A listed industrial company is considering a major investment. The companys investment projects team needs an appropriate rate at which to discount the estimated after-tax cash flows for the investment. Following the companys normal practice this is based on the Weighted Average Cost of Capital.

Statement of financial position/long-term financing information:

	$m
160 m. ordinary shares of $0.5 each	80
Share premium account	27
Revaluation reserve	26
Retained earnings	9
7.2% loan	67

The loan interest for the current year has just been paid. Interest is payable at the end of each of the next 3 years and the loan is to be redeemed, in cash, at a 5% premium at the end of the three years.

A dividend of 18c per share has just been paid. Dividends have shown an average annual growth rate of 7% over recent years.

The current share price is 210c and the loan has a market value of $97 (per $100 nominal).

The corporation tax rate is expected to be 30% for the near future.

Required:

1. Calculate the companys Weighted Average Cost of Capital (WACC).

Explain your workings and any assumptions.

Justify the basis of the weightings which you used.

2. Explain any criticisms which could be made of using the figure calculated above as the discount rate for assessing the investment.

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