Chalfield plc is a regional restaurant operator. The companys latest strategic plan sets the objective of creating a national chain which generates operating profits of 10 million per annum. Chalfield will need to raise additional capital to fund its planned expansion, and expects to have an enterprise value (market values of debt plus equity) of 90 million.

Following discussions with investors, the company has established that in order to fund the expansion, equity holders and debt providers will require the following rates of return on their investments, at the specified levels of gearing.

Debt: Equity ratio.	30% : 70%	40% : 60%	50% : 50%
Expected return for:
Equity (Shareholders)	12.0%	13.0%	14.0%
Debt providers (Term loan)	4.5%	4.75%	6.25%

Corporate income tax (Corporation tax) is payable at a rate of 20%, on all profits after deduction of interest costs.

Required:

1. Calculate the Weighted Average Cost of Capital for each of the potential capital structures identified above.

(12 Marks)

2. Discuss your results and recommend which level of financial gearing should be adopted as the companys target capital structure.

(6 Marks)

3. Based on your preferred Debt to Equity Ratio, and assuming that the company pays an annual dividend of 2 million, calculate:

1. Dividend yield (ignore taxation)

2. Interest cover

3. Price Earnings ratio

(12 Marks)

4. The directors of Chalfield plc have arranged to see their bankers to discuss a new bank loan. What aspects will the bank wish to consider before agreeing a new loan facility?

(20 Marks)