AngloGold Ashanti is a gold mining company. It is currently financed by a mixture of debt and equity as follows:

Debt: 1,000,000,000 retained earnings, 10,000,000 irredeemable debentures, loan repayable in 2025 at 16% fixed interest rate.

Equity: 1,100,000 ordinary shares trading at the market price of $3.35, 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 1.25.

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 per annum 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:

• State the factors affecting the cost of capital.
• Calculate AngloGold Ashanti Plc's weighted average cost of capital (WACC).
• With reasons, comment whether AngloGold Ashanti Plc should purchase Barrick Gold Plc.
• State any assumptions that you have made in arriving at your answers to parts.