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Question 1 [31] Luxbus Ltd is a company that provides luxury bus transport between major cities and a range of larger towns throughout South Africa.
Question 1 [31] Luxbus Ltd is a company that provides luxury bus transport between major cities and a range of larger towns throughout South Africa. The demand for its bus services has increased significantly and the company must expand its fleet of buses to meet the increased demand. The company requires R3 000000 to add the needed capacity to its fleet. The company can raise the money by issuing shares or from a long-term loan. Company management made it clear that the financing source selected must minimise its weighted average cost of capital (WACC). The current market values of its existing capital structure and its WACC are as follows: Additional information: - The company has 2000000 shares in issue. If it decides to raise the additional capital through a share issue, it will issue an additional 1500000 shares. - The shareholders require a 22% rate of return. - The company paid a dividend of R1.50 per share and expects the dividend to grow by 3% per year, indefinitely. - The existing long-term loan is for a period of five years with an interest rate of 9%. An additional long-term-Ioan can be obtained at 8.4% per year for five years. Current long-term loans in the market bear an interest rate of 8.4%. - The tax rate is 28%. Required: 1.1 Calculate the company's WACC for each of the two sources of capital options available to the company. Base the calculations on the market values. (26) 1.2 Recommend to the company's management the capital financing option they should select, giving reasons for your recommendations
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