QUESTION $3$

$[25$ marks$]$

Hammerson Ltd is an all$-$equity financed company with $10000$ outstanding ordinary shares, each valued

at the market price of R$25,00.$ The company has decided to modify its capital structure to capture the tax

benefits of debt. The plan is to have a target debt ratio of $30\%.$ The company pays all its earnings as

dividends and is subject to a $28\%$ tax rate. The expected sales are R$530000,$ fixed costs are estimated

at R$250000$ and variable cost are estimated at $30\%$ of sales.

Details of the pursued capital structures are as follow:

Capital structure $A$ at $30\%$ debt ratio

Hammerson Ltd will acquire debt at a before$-$tax cost of debt of $11\mathrm{.}75\%.$

REQUIRED:

$3\mathrm{.}2$ Calculate the weighted average cost of capital $($WACC$)$ for both the current and proposed debt

structures.

$(13$ marks$)$

$3\mathrm{.}3$ Which capital structure would you advise the company to choose if the aim is to maximise

shareholder wealth?

$(4$ marks$)$