QUESTION 2

Ledla Structural Development (Pty) Ltd aim to expand production capacity by investing R14 million in the new plant and machinery to produce personal protective equipment. The management of the company is interested in measuring the overall cost of financing of this project.

Ledla Structural Development (Pty) Ltd wants to maintain the present 40% debt in the firm's capital structure. The company expects to have net income of R2.8 million and bases its dividend payments on the residual policy. Debt financing may be obtained at a before-tax cost of 16%. Ordinary shares, which are currently selling for R30 a share, may be issued to net R20 after flotation costs.

The firm paid a dividend (Do) of R1.50 per share in the previous financial year and had a growth rate of 7% over the past few years. It is expected that this growth rate will be maintained in future. The tax rate is 28%.

2.1). Identify the various forms (new ordinary shares, retained earnings, debt), amounts and the weights to be used in the calculation of the weighted average cost of capital (WACC).

2.2) Calculate component costs and the weighted average cost of capital.