Question $1[29]$

$1\mathrm{.}1.$ Scoot $($Pty$)$ Ltd is planning the development and production of a battery$-$

operated, two$-$wheeled scooter that people can use to commute faster in towns

and cities where using other forms of transport wastes valuable time owing to

high levels of traffic congestion. To finalise the design and start production, the

company requires $R4\mathrm{.}5$ million but it is uncertain about whether to raise the

additional funds through equity or debt finance, because the decision directly

impacts the weighted average cost of capital $($WACC$).$

The following information was prepared$|$by the company's accountant:

Current capital structure of the company

Equity and preference share values are stated at current market values.

The cost of equity is $19\%.$

The long$-$term loan was obtained at an interest rate of $17\%$ per annum and

must be repaid at the end of $5$ years. Long$-$term loans currently available in

the market trade at $15\mathrm{.}28\%$ per annum.

The company has set its target debt equity ratio at $70$:$30.$

The $13\%$ preference shares are non$-$convertible. Preference shares are

trading in the market at $14\%.$

The tax rate is $28\%.$

Required:

Show all formulas and all calculations and round off all calculations to the

nearest whole number.

Use the information provided to calculate the company's current weighted

average cost of capital $($WACC$).$

$1\mathrm{.}2.$ Scoot's chief executive officer $($CEO$)$ is concerned about the potential risks that

the company may be exposed to because, at present, the company does not

have a risk management plan in place. The CEO asked you to briefly explain

the key activities involved in the risk management process to develop an

effective risk management plan.

Required:

Briefly explain the key activities involved in a risk management process.