Palma Ltd, a manufacturer of games accessories and boys toys, is engaged in rapid expansion. Management has been advised that discounted cash flow techniques provide the most acceptable appraisal methods for their needs. Palma Ltd has the following extract from its financial position: N$000 Authorised share capital 15 000 000 @ 50c 7 500 Issued share capital 10 000 000 @ 50c 5 000 Share premium 2 340 Revaluation reserve 1 610 Other reserves 4 615 Shareholders funds 13 565 N$000 12% NS100 irredeemable debentures 2 500 10% N$100 redeemable debentures 2 000 14% Long term loan 3 000 7 500 Palma Ltd.s shares have a current market value of N$1.56 cum div. A dividend of 18c is due to be paid shortly. All debt interest is paid annually in arrears and has just been paid. The company has been growing at a rate of 5 %. This growth should be maintained in the foreseeable future. The 12% debentures have a market value of NS80. The 10% debentures are to be redeemed in eight years time at N$95 per $100 nominal. The company has a current market required return of 16.67% before tax. The 14% loan is not traded on the open market, but its effective pre-tax cost has been estimated at 18%, It is redeemable at par in three years time. The company tax rate for Palma Ltd is 40% Required: a) Calculate the after tax Weighted average cost of capital (WACC) of Palma Ltd. (NB. The weighting should be based on market values). (28) b) Discuss what is meant by a target WACC and how can company use this concept t