Courier Company $($Pty$)$ Ltd provides courier services throughout South Africa. Company

management wants to expand its fleet of vehicles due to a rapidly growing demand for

courier services. The company will require R$5000000$ to finance the expansion of its

fleet. The company's current capital structure is as follows:

Additional information

The company has issued $300000$ ordinary shares and the shareholders expect a

$20\%$ return.

The company has declared a dividend of R$3\mathrm{.}00$ per share and expects that future

dividends will grow at $4\%$ per annum for the foreseeable future.

The current market value of the ordinary shares $($equity$)$ is R$5850000.$

The current market value of the preference shares is R$3125000.$

To finance the R$5000000$ needed to expand its fleet, the company is considering the

following options. The company will base its decision on the weighted average cost of

capital and other considerations relevant to each option.

Option $1$:

Issuing $15\%$ convertible preference shares for $50\%$ of the required finance. Similar

preference shares are currently trading at $12\%.$

Obtaining a secured seven $(7)$ year long$-$term loan bearing $14\%$ interest per

annum from its bankers for the remaining $50\%$ of the required finance. The current

interest rate for similar long$-$term loans is $15\mathrm{.}3\%.$

Option $2$:

Issuing unsecured debentures for the total financing required at $16\%$ repayable in

a lump sum at the end of seven $(7)$ years. The current interest rate for similar

debentures is $18\mathrm{.}1\%.$

The tax rate is $28\%.$

Required:

Note:

Show all formulas and all calculations.

Round all final answers off to the nearest whole number.

$2\mathrm{.}1$ Analyse the information provided and calculate the current weighted average cost

of capital $($WACC$)$ for the company for both financing options based on the market

values of the sources of capital.

$2\mathrm{.}2$ Recommend to Company management which option it should choose giving

reasons for your recommendation.