Question 7.30 OPM is a private equity company that invests in established small to medium unlisted companies that have growth potential within the agricultural and industrial sectors. OPM was required to undertake valuations of its investments as of 31 May 2014. OPM owns a controlling interest in Crescent Chickens (Pty) Ltd, which supplies poultry products to its customers throughout the country. Its customers are major food retailers and fast food chains and the company has a 2% market share. As part of the valuation process, OPM is required to determine the WACC of Crescent Chickens (Pty) Ltd and the following information is relevant: - The current yield on the R186 long-term government bond is 7.8% per annum, while shortterm government treasury bills are yielding 4.9% per annum. - The prime overdraft rate is presently 8.5% per annum. 756 FINANCIAL MANAGEMENT The average historic market risk premium for the South African equity market is 5.5% per annum. - Current information applicable to listed poultry producers and the wider agricultural sector is presented below: Mr. Henry Koopman (a manager at OPM) believes the most appropriate way to lever and unlever betas is to use the following Hamada formula: B0=B1/[1+(1T)(D/E)] Where: BU=unleveredbetaBL=leveredbetaT=taxationrateD=marketvalueofdebtE=marketvalueofequity The corporate tax rate is 28%. Interest on long-term borrowings is payable at a variable rate linked to the prime overdraft rate. The interest rate payable is set at 250 basis points (2.5%) above the prime overdraft rate. OPM's target long-term debt-equity ratio for Cresent Chickens is 25% and is based on market values. Required: Determine the weighted average cost of capital (WACC) that should be employed to discount the future operating cash flows of Crescent Chickens (Pty) Ltd. [SAICA ITC (adapted - this is limited to the section which requires the calculation of WACC)]