Pulse is currently considering investing in a new project that will involve raising HK$ 3m of additional finance. The company has recently issued new...
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Pulse is currently considering investing in a new project that will involve raising HK$ 3m of additional finance. The company has recently issued new shares and needs to calculate a new discount rate to use in its investment appraisal calculations.

You have been given the following information about the company's current capital structure:

3,000,000 Ordinary Shares with market value of HK$2.10 each.

HK$2,000,000 7% bond redeemable in 2030 with market value of HK$1080 per HK$1000 bond

HK$500,000 4 year bank loan at bank base rate plus 5% (bank base rate is currently 1%)

The return on long term government securities is 2%, the return on the appropriate market is 9% and the company's beta is 1.1. The corporation tax rate is 20%.


Required:

a)   Calculate the current after tax weighted average cost of capital.

(15 marks)

b)   What is meant by asymmetric information in the relationship between bankers and borrowers and how can any issues caused by this be resolved?

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