Freedom Foods (ASX: FNP) is an Australian producer off a wide array of health goods such

as dairy and plant-based beverages and various nutritional products. In 2020, with an aim to

pay senior and secured debt and bolster its weakened working capital, FNP raised

$265,000,000 via as subordinated secured convertible notes issue at $ 1 apiece. Perich

family, the largest shareholder of the group, contributed $200,000 through their sister

company Arrovest Pty Ltd.

In November 2020, revelations showed approximately $590,000,000 in inventory had to be

written down and several years' worth of accounts had to be restated. Extensive investigation

also pointed to the prospect of fraud. In addition, NP was also facing two class actions in

Australia, and one filed in the USA. After revelation of several accounting irregularities,

restatement of accounts, and write-downs, FNP went into a trading halt in June 2020 until 30

October 2020.

Required

Using FNP's 2020 Annual Report, estimate the firm's weighted average cost of

capital (WACC) and discuss the limitations /reliability of your calculation. (Show your

calculations) (10 marks)

Why would FNP calculate its WACC, in what frequency, and how can FNP affect its

WACC? (5 marks)

What is the rate of return an investor should require from FNP ordinary shares? Is

WACC a sound metric that finance managers can use for this purpose? Discuss

(10 marks)

(iv)

Does adding further debt to the already highly leveraged business which is also in

turmoil make sense to you? What would be the key factors that might have

motivated the FNP management to raise debt via issuing subordinated secured

convertible notes? (10 marks)

(v)

Discuss the potential implications of issuing subordinated secured convertible notes

on the current NP ordinary shareholders? (5 marks)

(vi)

Identify and discuss the feasibility, advantages, and disadvantages of two potential

sources FNP management has most probably considered before deciding in favour

of subordinated secured convertible notes. (10 marks)