Question
Maize is a component to make a staple food in Tanzania. For this reason, maize is a cash and food crop for many Africans especially
Maize is a component to make a staple food in Tanzania. For this reason, maize is a cash and food crop for many Africans especially Tanzanians. Based on this fact, there are agriculture opportunity to generate revenue for an entrepreneur. Riziki wants to start an agriculture farm cultivating maize for sale. The agricultural plan involves cultivating 100 Acres of maize. According to his assessment, there are following requirements for the business to begin. 1. New Tractor with a market value of Tshs. 48,000,000.00 2. Seeds worth Tshs. 2,000,000.00 3. Tilling and ploughing the land Tshs. 7,000,000.00 4. An agricultural consultant to ensure the maximum yield of maize with a consultation fee of Tshs. 2,000,000.00. 5. Maintaining the farm to harvest would cost Tshs, 12,000,000.00 6. Harvesting will cost Tshs, 8,600,000,00 7. Transportation and Storage will cost Tshs. 2,500,000. 8. Miscellaneous expected to be 10% of the gross expenses of the project. Riziki had an initial capital of Tshs. 23,510,000 and received Tshs. 5,000,000 from the Hassan his brother in exchange for 5% of the business. At the same time, Riziki received Tshs. 6,500,000. From Anna his sister in exchange for 7% of the business. Due to the fact that agriculture project required additional funding, Riziki raised Tshs. 20,000,000 by taking a loan from SACCOS with an interest rate of 3.21% per year and 19,000,000 from a bank loan with an interest rate of 12%. However, the funds were inadequate that required to raise additional funds amounting to Tshs. 8,000,000 with an interest of 15% per month from short-term lenders.
Required:
I. Determine the capital structure of the agricultural business project.
II. To calculate the weighted cost of capital of the project.
III. As a financial manager, provide recommendations to reduce the cost of capital of the project
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