DigiCut Production & Advertising Limited is a subsidiary of Groupe Nduom (GN) and is a full-service advertising agency and public relations (PR) consultancy company. It was established and started operations in 2010 as part of the former Ghana Media Group until 1st October, 2014, when it stepped out re-strategized to take the ever-increasing advertising and PR needs of Groupe Nduom companies and its clients in Ghana. The company was subsequently re-registered as a public limited liability company after the decision of the Shareholder and Board of the Company to go public and raise funds for its operations on 19 December 2017.

The company successfully listed on the Ghana Alternative Exchange (GAX) in 2018 at an IPO price of GHS 0.08. The GAX is a parallel market operated by the Ghana Stock Exchange, which focuses on businesses with a growth potential. The GAX accommodates companies at various stages of their development, including start-ups and existing enterprises, both small and medium.

Currently, Digicut has identified new opportunities in the market for advertising and public relations given that most companies are adjusting to the new normal. Management has proposed to the board that Digicut issues new shares and invest the funds raised in equipment needed for Augmented Reality advertising, an area which most Ghanaian advertising firms have not explored. The Chief Financial Officer estimates that the company will need about GHS3,500,000 to successfully explore this new area. Digicut currently has 118,890,621 shares outstanding, however the company must raise the additional GHS 3,500,000 in equity capital by issuing 38,888,889 new shares at the current share price of GHS0.09 per share.

The CFO is however concerned about the general performance of the economy in general and the stock market in particular and how it could potentially affect the timing of the stock issue. In his report to the board, he included a short brief on the history and outlook of the economy. The economy seemed quite stable to him given the low cost of borrowing, the last time he checked government was issuing 91-day Treasury bills at 12.8% per annum. Corporate taxes were, however increased to 35% at the last budget reading. Table 1 presents an excerpt from his report and represents annual returns on the Ghana Stock Exchange, All-Share Index over the last six years. His research also shows that the returns on Digicut are not very responsive to movements on the stock exchange. Since Digicut was listed, unit movement in the returns on the Ghana Stock Exchange has resulted in a 0.15 unit movement in Digicut in the same direction as the market movement.

As he ponders over the timing of the stock issue, he made a mental note on a sticky note to explore the possibility of raising debt financing from Absa bank if they decided the timing was bad. Digicuts corporate banker had mentioned that Absa would be willing to lend to them at a rate of 21% per annum.

In the last meeting with the board, the board chair had raised issue with the investment in Augmented Reality advertising equipment. He had asked that the CFO present an Net Present Value Analysis of the equipment. As an intern at Digicut working with the Chief Financial Officer, he has taked you with computing the companys Weighted Average Cost of Capital. The Weighted Average Cost of Capital will then be used in appraising the new Augmented Reality equipment the firm seeks to purchase. The CFO has additionally presented you with the most recent financial statement of the firm.

Required:

Prepare a step by step hand-written presentation of your WACC computation and write a short memo explaining what the computed value means to the CFO of Digicut.

Table 1 Annual returns on the GSE All-Share Index

Year Return

2015. 2015 -3.09%

2016. 2016 74.4%

2017. 2017 25.4%

2018. 2018 -5.63%

2019. 2019 -16.31%

2020. 2020 16.00%

DIGICUT PRODUCTION & ADVERTISING PLC Financial Statement for the year ended 3t December 2019 STATEMENT OF FINANCIAL POSITION Assets Notes 2019 2018 GHC GHE Non-current Assets Property, plant and equipment Capital work-in-progress 11 408,223 11 525,292 933,515 861,804 525,292 1,387,096 Current Assets Accounts receivable Taxation 12 4.706,612 10 172,415 19,551 3.570,780 168,915 1,634,262 Cash and cash equivalents 13 4,898,578 5,373.957 Total Assets 5,832,093 6,761,053 Equity and Liabilities Equity Stated capital Income surplus 14 3,103,811 471,934 3,103,811 1,568,098 4,671,909 3.575,745 Non-current Liabilities Borrowings 15 1,011,625 1,005,625 Current Liabilities Accounts payable 16 1,244.723 1,083,519 Total Equity and Liabilities 5,832,093 6,761,053 The financial statements on pages 9 to 12 were approved by the board of directors on 3159 MHR 2021 and signed on their behalf by die wV. Joseph Kusi.Tiede Director John Sterlin Director The notes on pages 13 to 22 form an integral part of these financial statements DIGICUT PRODUCTION & ADVERTISING PLC Financial Statement for the year ended December 2019 STATEMENT OF COMPREHENSIVE INCOME Notes 2018 2019 GHO GHE Revenue 4 5 6 410,457 (174,937) 235,520 123,662 359,182 (1,455,346) (1,096,164) 2,204,680 (700,248) 1,504,432 85,634 1,590,066 (2,387,463) (797,396) (111,184) (908,580) Cost of sales Gross profit Other operating income Operating profit Admin and general expenses Profit before interest and tax Finance cost Profit before tax Income tax expense Profit after tax transferred to income surplus Other comprehensive income Total comprehensive income 17 7 8 (1,096,164) 9 (1,096,164) (908,580) (1,096,164) (908,580) Earnings per share (basic / diluted) 10 (0.0092) (0.0076) DIGICUT PRODUCTION & ADVERTISING PLC Financial Statement for the year ended 3t December 2019 STATEMENT OF FINANCIAL POSITION Assets Notes 2019 2018 GHC GHE Non-current Assets Property, plant and equipment Capital work-in-progress 11 408,223 11 525,292 933,515 861,804 525,292 1,387,096 Current Assets Accounts receivable Taxation 12 4.706,612 10 172,415 19,551 3.570,780 168,915 1,634,262 Cash and cash equivalents 13 4,898,578 5,373.957 Total Assets 5,832,093 6,761,053 Equity and Liabilities Equity Stated capital Income surplus 14 3,103,811 471,934 3,103,811 1,568,098 4,671,909 3.575,745 Non-current Liabilities Borrowings 15 1,011,625 1,005,625 Current Liabilities Accounts payable 16 1,244.723 1,083,519 Total Equity and Liabilities 5,832,093 6,761,053 The financial statements on pages 9 to 12 were approved by the board of directors on 3159 MHR 2021 and signed on their behalf by die wV. Joseph Kusi.Tiede Director John Sterlin Director The notes on pages 13 to 22 form an integral part of these financial statements DIGICUT PRODUCTION & ADVERTISING PLC Financial Statement for the year ended December 2019 STATEMENT OF COMPREHENSIVE INCOME Notes 2018 2019 GHO GHE Revenue 4 5 6 410,457 (174,937) 235,520 123,662 359,182 (1,455,346) (1,096,164) 2,204,680 (700,248) 1,504,432 85,634 1,590,066 (2,387,463) (797,396) (111,184) (908,580) Cost of sales Gross profit Other operating income Operating profit Admin and general expenses Profit before interest and tax Finance cost Profit before tax Income tax expense Profit after tax transferred to income surplus Other comprehensive income Total comprehensive income 17 7 8 (1,096,164) 9 (1,096,164) (908,580) (1,096,164) (908,580) Earnings per share (basic / diluted) 10 (0.0092) (0.0076)