question 1 )

Coffee Worldwide has the following capital structure:

• Common share capital: R300 000 7% preference shares: R100 000
• Long-term loan: R200 000

The cost of equity is 3% and Coffee Worldwide pays 12% on the bank loan. It pays 35% income tax. Determine its weighted average cost of capital (WACC).

Question 2)

AeroBeing is a large company with two departments: aerospace and air transport.

Each department currently finances.

its activities through 45% of debt finance, 35% of ordinary equity

20% of preferred equity.

The cost of preferred equity is equal to 11%.

The company's borrowing rate is 10%, while its tax rate is 35%.

AeroBeing's management would like to know the minimum weighted average cost of capital for each department. Since the beta for the two departments cannot be computed, the management identified two companies that operate in the same sectors and have a capital structure similar to AeroBeing, thus providing good proxies for the required beta values.

The first company is a key operator in the aerospace sector and has a beta of 1.5, while the second company is a growing player in the air transport sector that has a beta of 0.5. The risk-free rate is currently 9% and the expected market return is 15%.

• i.Compute the weighted average cost of capital for each department of AeroBeing.