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Question 1 (29) Aviation (Pty) Ltd is a supplier of aeroplane spare parts and components to the local aviation industry The management of the company is very interested in adjusting the capital structure of the company to achieve the best possible combination of resources at the lowest weighted average cost of capital (WACC) possible. Management approached you with a request to assist them in calculating the current WACC as well as the WACC at target ratios. From their research, management concluded that the target ratios should be the following: Ordinary shares 45% Preference shares 25% Long-term loan 30% The company also provided the following information The number of shares in issue is 2 800 000 The market value of equity (ordinary shares) is R83 475 000, The current dividend paid is R4.50 and the expected dividend growth rate is 6% per annum. The shareholders require a return of Ke = 22% The company has 12% non-convertible preference shares in its current capital structure and similar preference shares are trading at 15% The company also has a long-term loan of 10 years bearing annual interest at 14% while similar loans are currently available at 16% interest per annum The after-tax cost of debt is 11% The bank overdraft rate is 18% and the current tax rate is 30% . The following information was extracted from the company's most recent statement of financial position: Ordinary shares issued Non-distributable reserve Retained income 12% preference shares (non-convertible) Long-term loan Bank overdraft Deferred taxation R 8 000 000 1 000 000 800 000 4 000 000 2 500 000 500 000 600 000 17 400 000 Required: 1.1 Calculate the weighted average cost of capital (WACC) of the company at both market value and target ratios. (21) What can the company conclude about its current capital structure when comparing its WACC at market values with the target WACC? (8) Page 5 of Assignment 1.2 Question 1 (29) Aviation (Pty) Ltd is a supplier of aeroplane spare parts and components to the local aviation industry The management of the company is very interested in adjusting the capital structure of the company to achieve the best possible combination of resources at the lowest weighted average cost of capital (WACC) possible. Management approached you with a request to assist them in calculating the current WACC as well as the WACC at target ratios. From their research, management concluded that the target ratios should be the following: Ordinary shares 45% Preference shares 25% Long-term loan 30% The company also provided the following information The number of shares in issue is 2 800 000 The market value of equity (ordinary shares) is R83 475 000, The current dividend paid is R4.50 and the expected dividend growth rate is 6% per annum. The shareholders require a return of Ke = 22% The company has 12% non-convertible preference shares in its current capital structure and similar preference shares are trading at 15% The company also has a long-term loan of 10 years bearing annual interest at 14% while similar loans are currently available at 16% interest per annum The after-tax cost of debt is 11% The bank overdraft rate is 18% and the current tax rate is 30% . The following information was extracted from the company's most recent statement of financial position: Ordinary shares issued Non-distributable reserve Retained income 12% preference shares (non-convertible) Long-term loan Bank overdraft Deferred taxation R 8 000 000 1 000 000 800 000 4 000 000 2 500 000 500 000 600 000 17 400 000 Required: 1.1 Calculate the weighted average cost of capital (WACC) of the company at both market value and target ratios. (21) What can the company conclude about its current capital structure when comparing its WACC at market values with the target WACC? (8) Page 5 of Assignment 1.2