Assume that the current date is 31 December 2020 Windy plc (Windy) manufactures and erects wind turbines. The company is listed in the UK and its financial year-end is 31 December. To date the company has increased in size and value by organic growth. Windy's board is now investigating the acquisition of 100% of the share capital of Wavey Ltd (Wavey), a manufacturer of wave energy converters. You are a member of Windy's finance team and the company's finance director has sent an email to you, extracts from which are shown below: I'm really busy with year-end work and would value your input regarding the Wavey acquisition. This would be a big investment for us and owning Wavey would mean that Windy was operating in a different technology sector. Were Windy to buy Wavey it would cost in the region of 35 million, which we would need to borrow. Our bankers are willing to lend us that sum, but at an interest rate of 11% pa. I want to explain to the board the implications of the investment, based primarily on its estimated NPV. Can you calculate an up to date WACC figure for me? Windy's management accounts at 31 December 2020 included the following: '000 1 ordinary shares 20,500 7% 1 preference shares 4,300 5% irredeemable debentures 5,100 3% redeemable debentures (note 1) 6,800 Note 1 These debentures are redeemable at par on 31 December 2023. The market values of Windy's capital at 31 December 2020 are: Ordinary shares (note 2) Preference shares Irredeemable debentures Redeemable debentures 4.20/share (cum-div) 1.50/share (ex-div) 103% (ex-interest) 101% (cum-interest) Note 2 Windy's ordinary dividend for the year to 31 December 2020 totals 5,125,000 and this is due to be paid in full on 12 January 2021. Windy's ordinary dividends have been increasing at a steady annual rate since the year ended 31 December 2015 when they totalled 4,428,000. Windy's issued ordinary share capital has not changed since 2012. You should assume that corporation tax will be payable at the rate of 17% for the foreseeable future and tax will be payable in the same year as the cash flows to which it relates. Requirements (a) Calculate Windy's WACC on 31 December 2020 using the dividend valuation model. . (16 marks) (b) Advise Windy's directors whether they should use the WACC figure calculated in (a) when appraising the Wavey purchase. (9 marks) (Total 25 marks) Assume that the current date is 31 December 2020 Windy plc (Windy) manufactures and erects wind turbines. The company is listed in the UK and its financial year-end is 31 December. To date the company has increased in size and value by organic growth. Windy's board is now investigating the acquisition of 100% of the share capital of Wavey Ltd (Wavey), a manufacturer of wave energy converters. You are a member of Windy's finance team and the company's finance director has sent an email to you, extracts from which are shown below: I'm really busy with year-end work and would value your input regarding the Wavey acquisition. This would be a big investment for us and owning Wavey would mean that Windy was operating in a different technology sector. Were Windy to buy Wavey it would cost in the region of 35 million, which we would need to borrow. Our bankers are willing to lend us that sum, but at an interest rate of 11% pa. I want to explain to the board the implications of the investment, based primarily on its estimated NPV. Can you calculate an up to date WACC figure for me? Windy's management accounts at 31 December 2020 included the following: '000 1 ordinary shares 20,500 7% 1 preference shares 4,300 5% irredeemable debentures 5,100 3% redeemable debentures (note 1) 6,800 Note 1 These debentures are redeemable at par on 31 December 2023. The market values of Windy's capital at 31 December 2020 are: Ordinary shares (note 2) Preference shares Irredeemable debentures Redeemable debentures 4.20/share (cum-div) 1.50/share (ex-div) 103% (ex-interest) 101% (cum-interest) Note 2 Windy's ordinary dividend for the year to 31 December 2020 totals 5,125,000 and this is due to be paid in full on 12 January 2021. Windy's ordinary dividends have been increasing at a steady annual rate since the year ended 31 December 2015 when they totalled 4,428,000. Windy's issued ordinary share capital has not changed since 2012. You should assume that corporation tax will be payable at the rate of 17% for the foreseeable future and tax will be payable in the same year as the cash flows to which it relates. Requirements (a) Calculate Windy's WACC on 31 December 2020 using the dividend valuation model. . (16 marks) (b) Advise Windy's directors whether they should use the WACC figure calculated in (a) when appraising the Wavey purchase. (9 marks) (Total 25 marks)