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Astra Plc operates in the production of medical equipment industry. It produces medical devices such...

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Finance

Astra Plc operates in the production of medical equipment industry. It produces medical devices such as diagnostic kits for the over-the-counter use. Due to the increased demands for medical devises. The company considers building a new 70 million manufacturing facility. This new plant is expected to generate aftertax cash flows of 7.25 million in perpetuity. The firm has a target debt-equity ratio of 0.65. The equity currently has a beta of 1.10, market risk premium is 7.0 per cent, and risk-free rate is 4.5 per cent. After tax cost of debt is 5.0 per cent.

(i) Calculate the weighted average cost of capital (WACC) for the company. (9 marks)

(ii) What is the NPV of the new facility? Should the company build it? (6 marks)

b) Discuss why it can be incorrect to evaluate all projects at the firm's current WACC. (10 marks)

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