Bonzo plc is a divisionalized company, quoted on the Ghana Stock Exchange. Two of its divisions are currently evaluating investment proposals and have submitted them to Head Office in Accra for approval. The project cash flows are as follows:Cement division (GHS000s) Timber division (GHS000s)Year: 0 -200 Year: 0 -150 1 +100 1 +75 2 +100 2 +48.36 3 +79.3 3 +75The following information about the company is available:Current balance sheet (summarized):(GHS000s)Assets: Net fixed assets 7,500Net current assets 2,460 9,960Finance: 30m 10p Ordinary shares 3,000Reserves 6,960 9,960Dividend/share and earnings/share recordYear Dividend (p) Earnings (p)t_4 5.12 6.19t_3 5.32 6.44t_2 5.53 6.69t_1 5.76 6.90t0(current year) 5.99 7.31The current total market value of the company’s shares is Ghc13.35 million, ex div. Bonzo plc has a beta of 1.16. The cement industry has a beta of 1.50 and the timber industry has a beta of 0.50. The annual return on three-year government stock is currently 11% and the expected return on the GSE All-Share Index is 17%. Ignore tax.Required:The company usually evaluates all investment proposals with NPV, using the cost of company capital as the discount rate. Estimate this discount rate and evaluate both projects.Advise the company as to why they should evaluate projects using risk-adjusted discount rates. Estimate an appropriate rate for each project and re-evaluate them both.
