AngloGold Ashanti is a gold mining Company. It is currently financed by a

mixture of debt and equity as follows:

$000$s

$1$ million $1$ ordinary shares $1,000$

Retained earnings $1,978$

$10,0001009\mathrm{.}5\%$ irredeemable debentures $1,000$

Loan repayable in $2025$ at $16\%$ fixed interest rate $250$

The market price of ordinary shares is $3\mathrm{.}35,$ and the debentures have a market

price of $94.$ The company pays corporation tax at a rate of $20\%.$ The current

return on government securities is $4\%,$ the average stock market rate of return

is $8\%$ and the company has a beta value of $1\mathrm{.}25.$

An opportunity has arisen to acquire Barrick Gold Plc$,$ a small company

operating in the same industry. The gold reserves are forecasted to last for $15$

years. The expected cash flow that Barrick Gold Plc will generate is $2,400,000$

in the first year following acquisition. This figure is expected to decline by

$240,000$ Pa for each of the next four years, after which it will stagnate at

$900,000$ until the gold reserves are fully depleted

Barrick Gold Plc has $8,500,000$ ordinary shares currently trading on the stock

market at a price of $85$ pence each. It also has debt of $3,200,000.$

The directors of AngloGold Ashanti Plc use the company$$s weighted average

cost of capital to appraise investment opportunities.

Required:

$1.$ State the factor affecting the cost of capital

$2.$ Calculate AngloGold Ashanti Plc weighted average cost of capital $($WACC$).$

$3.$ With reasons, comment whether AngloGold Ashanti Plc should purchase

Barrick Gold Plc$.$

$4.$ State any assumptions that you have made in arriving at your answers to parts