Megan and Ray Limited (hereafter referred to as Megan and Ray or the company) is a major construction company that has most of its operations in Southern Africa, in fact, its corporate office is in Sandton, in Gauteng province, South Africa. The company is listed on the JSE. It is one of the biggest companies in the construction sector in South Africa. Its JSEs sector market capitalisation is currently estimated at 25%. The company has been doing relatively well despite the recent global economic hardships which have negatively affected this sector and now the Covid -19 pandemic is also exacerbating the problem. Recently, the company acquired rights to build 3 bridges on some of the major highways in Southern Mozambique. This business venture is surely a good opportunity for the company to continue to do relatively well and survive the aforementioned economic problems. The companys management proposes to finance the new operation through a rights issue of ordinary shares. At present, the company is financed by a combination of ordinary share capital, non-redeemable preference shares and redeemable debentures. An extract from the companys financial statements at 30 June 2021 is as follows: Question 1 (30 Marks) T-Man Ltd is a company that produces and sells lampshades. They have been operating for 5 years now and have seen some tremendous growth in their operations during this period. Due to the growth that they have experienced senior management, in a special resolution, decided that they wanted to invest in a new lampshade maker. They hired, on a temporary basis, a financial analyst to perform a capital budgeting cash flow analysis to determine the financial viability of the new machine. The new machine would give the company additional revenue of R30 000 per annum. The analysis yielded an NPV of -60 783. Due to the negative NPV, the analyst concluded that the new machine should not be invested in. Tshepo Voster, the financial director, was convinced that the machine was vital for expansion and that it would yield good returns. He investigated different financing possibilities. He found a local manufacturer that was willing to lease the machine to T-Man Ltd. The following information was given relating to the lease agreement (finance lease in terms of IAS 17): Annual Lease payments Lease period Annual maintenance costs Insurance costs R35 000 5 years R5 000 Nil (in advance) (will be maintained at the end of each period) (covered by the lease agreement) 1 Extract from the statement of financial position for Megan and Ray Ltd at 30 June 2021 R Ordinary shares Non-distributable reserve Retained profit 15% non-redeemable preference shares 16% redeemable debentures Bank overdraft Deferred tax Other information: 5 000 000 600 000 400 000 2 000 000 1 000 000 300 000 600 000 9 900 000 The company has 1 000 000 ordinary shares in issue, with each share having a nominal value of R5. Megan and Ray paid a dividend of R2 per share in the year ended 30 June 2021 and dividends are expected to grow at a constant rate of 5% per annum in the long term. The shareholders required rate of return is 24%. The company has 400 000 non-redeemable preference shares in issue. The dividend rate on these shares is 15% and their par value is R5 per share. Similar preference shares are currently yielding 12% per annum. The 25 000 redeemable debentures mature in 10 years and are redeemable par value of R4 per debenture. The debenture pre-tax coupon rate is 16% per annum and coupon interest is paid annually. The pre-tax yield to maturity (YTM) of similar debentures in the sector is currently at 18.34% per annum. The current corporate tax rate is 28% assumed. Required: a) Discuss the overall importance of the weighted average cost o f capital (WACC) and justify why it should be determined with the utmost care. (2 Marks) b) Determine the companys WACC using all the following bases: (20 Marks) i) Market values; ii) Book values; and iii) Target values (ratios) if the optimal debt: equity ratio is ordinary shares 60%, preference shares 20% and long- term loans 20%. c) Distinguish among the use of all the 3 WACC bases mentioned in (number two) above.