FINANCE

Question 3 This is a two-part question. If you choose to answer this question, you must answer 03.1 and 3.2. Read the case study below and answer the questions based on the case study. Bandro Limited (Bandro) is in the process of assessing its potential investment in projects for the 2020 financial year. The company is listed on the JSE. The board of directors has decided that the company will make use of the net present value method for assessing potential investments. As a result, Bandro needs to calculate its weighted average cost of capital (WACC rate) for the purposes of the net present value analysis. The group financial manager has been tasked with compiling information relating to the sources of capital for Bandro. Bandro only has issued stated capital and redeemable non-convertible debentures as forms of long-term financing. In addition, the company finances its working capital cycle with bank overdrafts and credit from suppliers. The following information has been compiled relating to financing of the company Standard deviation of returns for Bandro compared to the market is 15.5% and the standard deviation of returns for the market is 11%. The correlation between the total market returns and Bandro's returns is 0.6. The current return on government bonds is 7.5%. The following is the annual performance of the JSE All Share Index over the last 4 years: Year 2015 2016 2017 2018 2019 Index Value 68 726 76 974 88 520 95 600 106 116 Per the share register the company has 500 000 issued shares. The last reported share price for Bandro is R35 per share. The company issued debentures on the JSE five years ago. The current book value of the debentures is R20million and the coupon rate is 10.5%. The effective interest rate on these bonds is 12% and their current market value is R22 million. Bandro is a South African company, and as a result the applicable tax rate is 28%. The accounts payable balance is R1.1 million and the company has no bank overdraft. 3.1 Calculate the weighted average cost of capital (WACC) for Bandro. All calculations should be rounded off to two decimal places. OsPm Hint: Students should make use of the following Beta formula: = B om 3.2 Discuss any arguments against using WACC. Please note that no marks are given for formulas. They are given only for the application and inputs into formulas