Dorper Ltd a company that specializes in breeding Dorper sheep in Zimbabwe has a target capital structure of 60% equity and 40% debt .The after-tax cost of future debt is 11% and the cost of new equity is 21%. The company's past cost of debt and equity on projects of similar risk was 8% and 19% respectively while the capital structure was 75% equity and 25% debt. The financial manager is currently considering a project with an expected return of 20% which will be financed from the
issue of ordinary shares as all retained income is already budgeted for on more profitable projects. The company recently issued debentures and as a result, the present capital structure in more heavily weighted towards debt.
i. Calculate the weighted average cost of capital (wacc) for Dorper Ltd.
[3 marks]
ii. State, with reasons, whether the project under consideration should be accepted.
iii. Explain reasons that could be attributed to a larger increase in cost of debt for Dorper Ltd.
iv. "Dorper management is choosing to raise additional capital using ordinary shares because they want new investors to come and participate in a gloomy company future". (High Yield Corporate Analyst,2017). Evaluate the analyst's statement.
v. Explain how the financial manager can utilize Sensitivity and Scenario analysis in making the expansion investment decision.