BACKGROUND TO CASE STUDY:

Wholesale Foods PLC is a manufacturer of healthy meals designed for people who do not have much spare time and wish to prepare food quickly. The meals are sold nationally through a number of retail outlets.

The business has grown significantly over recent years, progressing from a family private limited company to become a PLC quoted on the stock market in 2010. At that time, a new Chief Executive was appointed in the interests of new shareholders. Over the following period, significant shareholders included some key mutual funds from the city.

You were appointed as Financial Director for Wholesale Foods PLC in April 2016, at the start of a new financial year.

The impact of Covid-19 and the restrictions placed on people going to work has actually had a positive impact on the company in that people have welcomed access to prepared but healthy meals. The creation of a website through which the public can order these meals and either collect or request delivery has contributed to very strong financial results over the past year.

Next month you have been asked to provide a report to the Board of Directors about the financial situation of the company, focusing on a number of areas highlighted recently by your fellow directors over the past few months.

PART 3: CAPITAL STRUCTURE:

In completing the investment appraisal in Part 2, you have used the companys estimated cost of capital of 10%. The other directors are familiar with this term but do not understand where the 10% comes from. In order to demonstrate this, you look at the financial structure of the company and the sources of finance which have been utilised.

Your aim is to calculate the cost for each type of finance and then combine the results to show the overall cost of capital, referred to as the Weighted Average Cost of Capital

The financial structure of Wholesale Foods PLC is as follows:

1. 53m of 1 ordinary shares with a market value of 2.25 per share. Dividend last year was 8p per share and the dividend has grown by 7% over the past 5 years.
2. 10m of 7.5% 1 preference shares with a market value of 1.20 per share. These preference shares were issued at a cost of 5%.
3. 10m of 8% Bank Loan.
4. 15m of 6% Loan Stock, not redeemable for many years to come. The market price of each unit is presently 90.

Corporation Tax in the UK is 25%.

Required:

(7)	To help you explain the concept of cost of capital to the directors, calculate the weighted average cost of capital for Wholesale Foods PLC. (14 marks)
(8)	Explain the link to the cost of capital used in the Net Present Value estimates in Part 2. (10 marks)
(9)	Comparing the weighted average cost of capital for Wholesale Foods PLC with the IRR calculations in Part 2, what do the results indicate to the company?

(6 marks)