FINANCIAL MANAGEMENT

QUESTION 3 [10 marks] Avalanche Entertainment is a software games company and, according to the CFO, "business is looking up". As a result, the CFO compiled and presented the following list of acceptable investment opportunities to the Board: Investment E C G A H. 1 B IRR (%) 23 22 21 19 12 9 8 Initial investment (R) 200 000 100 000 300 000 200 000 100 000 400 000 300 000 Avalanche Entertainment intends to raise R1 000 000 for long-term investments. The company will finance the capital budget as follows: Log-term debt (40%): The company will borrow R400 000 at an after-tax cost of 8%. Ordinary shares (40%): The company will issue ordinary shares at the cost of 10%. Preferred shares: The company will finance the rest of the money by issuing preference shares at the cost of 13%. REQUIRED 3.1 Calculate Avalanche Entertainment's weighted average cost of capital. (6 marks) 3.2 In which investment(s) should Avalanche Entertainment invest, based on the available capital budget, IRR and cost of capital? (4 marks)