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Accounting and Finance, the company’s Weighted Average Cost of Capital.

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The Case Study submission can be a Word document, an Excel file or a PDF file. You may submit more than one attachment if you wish. You are strongly urged to include all workings, so that you can receive partial marks if the answer is incorrect but some of the work you have done is correct. There is no word limit. However, any form of professional writing should be concise, so if your Case Study is unnecessarily wordy, this could affect your mark. Any member of your group may submit the Case Study – but only one person should do so. The mark for your Case Study will automatically ...

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The Case Study submission can be a Word document, an Excel file or a PDF file. You may submit more than one attachment if you wish. You are strongly urged to include all workings, so that you can receive partial marks if the answer is incorrect but some of the work you have done is correct. There is no word limit. However, any form of professional writing should be concise, so if your Case Study is unnecessarily wordy, this could affect your mark. Any member of your group may submit the Case Study – but only one person should do so. The mark for your Case Study will automatically go to all members of the group, as shown on the LMS. However, of one or more members of the group fails to contribute to the Case Study, despite being given the opportunity to do so, you have the option of omitting their name from your submission, and they will not receive a mark. Case Study Data The following data relate to West Coast Mining Ltd. West Coast Mining is considering undertaking a gold‐mining project.  The company has undertaken an environmental impact study into the project, at a cost of $2.35 million. This study has indicated that the project will meet the government’s environmental regulations.  The project will last for 5 years.  The project will require the purchase of new equipment at a cost of $8 million. This equipment will be depreciated to a book value of zero. The company has the option of using straight‐line depreciation or diminishing value depreciation.  The mine will produce 65,000 ounces of gold in its first year. This will then decline by 9,000 ounces per year, as the resource is depleted, so that it will only be producing 29,000 ounces in the fifth year.  The cost of gold is expected to remain constant at $112 per ounce over the life of the project.  Incremental costs, equal to 34% of incremental revenue, will be incurred each year of the project.  Clean‐up costs of $2.95 million will be incurred after the end of the project (i.e. in the 6th year).  The mining equipment is expected to have a salvage value of $2.55 million.  The project will require additional net working capital of $5.2 million. This will be recovered in full after the completion of the project. West Coast Mining has the following items on the Liabilities & Equity side of its balance sheet:  Preference Shares o There are 1 million preference shares on issue o These preference shares are currently trading at a price of $9.70 o They pay an annual dividend of $1  Ordinary Shares o There are 5 million ordinary shares on issue o These shares have a beta of 1.4 o They have just paid a dividend of $2.08 o This dividend is expected to grow at a rate of 8.2% until the dividend in Year 3, and then at a rate of 3.8% in perpetuity  Corporate Bonds o The bonds have a total face value of $13 million o They mature in 5 years o They pay a quarterly coupon payment at a coupon rate of 7.4% p.a. o The company’s bond yield is 4.05%. Additional data  The historical return on the market portfolio is 10.5%  The corporate tax rate is 30%  The current yield on 10‐year Australian Treasury Bonds is 3.47% in the most recent month Please download the attached file.

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One of the fundamental assumptions of WACC is that company maintains its capital structure for the project. Therefore, it has been assumed that company will use same proportion of equity capital, preference capital and debt capital as calculated in WACC for financing the project.

It has been further assume that company will earn taxable profits from other projects in year 6 and it will be able to set off clean up costs against that other project. This will reduce net cost of cleaning up and increase net present value.

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