Question $2$

Asus Plc is an IT services company listed on the London Stock Exchange, which is looking to

expand its operations into the provision of self$-$service point$-$of$-$sale systems for supermarkets

across Europe. The company has grown rapidly in recent years with annual dividends having

seen consistent growth as follows:

Years $20192020202120222023$

Dividends $10\mathrm{.}00$p $12\mathrm{.}00$p $13\mathrm{.}50$p $14\mathrm{.}50$p $15\mathrm{.}75$p

The company expects dividends to continue to grow for the foreseeable future in line with this

recent dividend profile. Extracts from the company$$s most recent Balance Sheet as at $31$ May

$2023$ are set out below:

$000000$

Ordinary $1$ shares $14,000$

$5\mathrm{.}5\%1$ irredeemable preference shares $10,000$

Retained earnings $19,400$

Total Equity $43,400$

$7\%$ irredeemable debentures $($at nominal value$)50,000$

$6\%$ unsecured loan notes $($at nominal value$)36,000$

Total non$-$current liabilities $86,000$

The current ex$-$dividend ordinary share price is $3\mathrm{.}50,$ whilst the current ex$-$dividend

preference share price is $0\mathrm{.}77.$

The irredeemable debentures have a current ex$-$interest market price of $86\mathrm{.}50$ per $100$

debenture, whilst the unsecured loan notes have a current ex$-$interest market price of $84$ per

$100$ loan note and will be redeemable at par in seven years$$ time.

The company pays corporation tax at a rate of $19\%.$ The company$$s current liabilities do not

include any overdraft borrowing.

Regarding the company$$s proposed expansion plans, the Chief Executive has expressed his preference for any financing requirements to come from increasing debt rather than increasing equity in order to move towards minimising the company$$s Weighted Average Cost of Capital $($WACC$).$

Required:

a$)$ From the available information, calculate using market values, the company$$s WACC $($show all workings clearly$).$

b$)$ Discuss the advantages and limitations of using the WACC as a discount rate to evaluate capital budgeting projects.