QUESTION TWO [50] You are the francial director of WestCo Led, a company that is listed on the Alemative Exchange (Aix). Since listing on the exchange, the company has periormed above markat expectations and the compary is considering listing on the JSE's main exchange in the near future. The board of directors have decided to emback on a plan of expansion, which will require an investment of R2 milion. You have ascentained the following useful infermation; 1. When the company listed on the AltX, 500000 shares of R1 each were issued. The company plans to meet the dividend projections made in the prospectus by growing dividends by 10% per annum for the next two years and by a constant rate of 12% thereather. The curtent dividend is R1 per share. 2. The ayerage cost of equity for similar listed comparies includes a risk premium of 8% and the beta of Wesco is approximately 1.25 times that of the market. The risk free fate is currently 5%. 3. WestCo has 100000 corvertible preference shares in issue, each with a par vahue of R40 and a dividend rate of 7\% per annum. The shareholders have an option to convert these preference shares into ordinary shares or to redeem the shares at a premium of 30% of par value in two years' time. The current retuin on similar preference shares is 11%. 4. The company has also issued 1000 debentures of R1000 each. There is no fored redemption date and these securifes carry a coupon rate of 20% per annum. The current return for this type of security is 15%. 5. The firm's target capital structure is 60% equity and 40% debt. 6. New investments are evaluated at a rate of 17%. 7. The current company tax rate is 28\%. Required: 1. Calculate the company's current and target weighted average cost (30 marks) of capital. 2. Advise the company how the add bonal R2 milion should be raised. (6 marks) All calculations that support your advice must be shown. 3. Comment on the fems existing approach to evaluating proposed investments. (4 marks) 4. Briefly identify sources of long term finance available to the company. (5 marks) 5. Define the term weighted average cost of capital of a company and explain its importance. (5 marks) You are the financial director of WestCo Ltd, a company that is listed on the Alternative Exchange (AltX). Since listing on the exchange, the company has performed above market expectations and the company is considering listing on the JSE's main exchange in the near future. The board of directors have decided to embark on a plan of expansion, which will require an investment of R2 million. You have ascertained the following useful information: 1. When the company listed on the AltX, 500000 shares of R1 each were issued. The company plans to meet the dividend projections made in the prospectus by growing dividends by 10% per annum for the next two years and by a constant rate of 12% thereafter. The current dividend is R1 per share. 2. The average cost of equity for similar listed companies includes a risk premium of 8% and the beta of WestCo is approximately 1.25 times that of the market. The risk free rate is currently 5%. 3. WestCo has 100000 convertible preference shares in issue, each with a par value of R40 and a dividend rate of 7% per annum. The shareholders have an option to convert these preference shares into ordinary shares or to redeem the shares at a premium of 30% of par value in two years' time. The current return on similar preference shares is 11%. 4. The company has also issued 1000 debentures of R1000 each. There is no fixed redemption date and these securities carry a coupon rate of 20% per annum. The current return for this type of security is 15%. 5. The firm's target capital structure is 60% equity and 40% debt. 6. New investments are evaluated at a rate of 17%. 7. The current company tax rate is 28%. Required: 1. Calculate the company's current and target weighted average cost of capital. (30 marks) 2. Advise the company how the additional R2 million should be raised. All calculations that support your advice must be shown. (6 marks) 3. Comment on the firms existing approach to evaluating proposed investments. (4 marks) 4. Briefly identify sources of long term finance available to the company. (5 marks) 5. Define the term weighted average cost of capital of a company and explain its importance. (5 marks) QUESTION TWO [50] You are the francial director of WestCo Led, a company that is listed on the Alemative Exchange (Aix). Since listing on the exchange, the company has periormed above markat expectations and the compary is considering listing on the JSE's main exchange in the near future. The board of directors have decided to emback on a plan of expansion, which will require an investment of R2 milion. You have ascentained the following useful infermation; 1. When the company listed on the AltX, 500000 shares of R1 each were issued. The company plans to meet the dividend projections made in the prospectus by growing dividends by 10% per annum for the next two years and by a constant rate of 12% thereather. The curtent dividend is R1 per share. 2. The ayerage cost of equity for similar listed comparies includes a risk premium of 8% and the beta of Wesco is approximately 1.25 times that of the market. The risk free fate is currently 5%. 3. WestCo has 100000 corvertible preference shares in issue, each with a par vahue of R40 and a dividend rate of 7\% per annum. The shareholders have an option to convert these preference shares into ordinary shares or to redeem the shares at a premium of 30% of par value in two years' time. The current retuin on similar preference shares is 11%. 4. The company has also issued 1000 debentures of R1000 each. There is no fored redemption date and these securifes carry a coupon rate of 20% per annum. The current return for this type of security is 15%. 5. The firm's target capital structure is 60% equity and 40% debt. 6. New investments are evaluated at a rate of 17%. 7. The current company tax rate is 28\%. Required: 1. Calculate the company's current and target weighted average cost (30 marks) of capital. 2. Advise the company how the add bonal R2 milion should be raised. (6 marks) All calculations that support your advice must be shown. 3. Comment on the fems existing approach to evaluating proposed investments. (4 marks) 4. Briefly identify sources of long term finance available to the company. (5 marks) 5. Define the term weighted average cost of capital of a company and explain its importance. (5 marks) You are the financial director of WestCo Ltd, a company that is listed on the Alternative Exchange (AltX). Since listing on the exchange, the company has performed above market expectations and the company is considering listing on the JSE's main exchange in the near future. The board of directors have decided to embark on a plan of expansion, which will require an investment of R2 million. You have ascertained the following useful information: 1. When the company listed on the AltX, 500000 shares of R1 each were issued. The company plans to meet the dividend projections made in the prospectus by growing dividends by 10% per annum for the next two years and by a constant rate of 12% thereafter. The current dividend is R1 per share. 2. The average cost of equity for similar listed companies includes a risk premium of 8% and the beta of WestCo is approximately 1.25 times that of the market. The risk free rate is currently 5%. 3. WestCo has 100000 convertible preference shares in issue, each with a par value of R40 and a dividend rate of 7% per annum. The shareholders have an option to convert these preference shares into ordinary shares or to redeem the shares at a premium of 30% of par value in two years' time. The current return on similar preference shares is 11%. 4. The company has also issued 1000 debentures of R1000 each. There is no fixed redemption date and these securities carry a coupon rate of 20% per annum. The current return for this type of security is 15%. 5. The firm's target capital structure is 60% equity and 40% debt. 6. New investments are evaluated at a rate of 17%. 7. The current company tax rate is 28%. Required: 1. Calculate the company's current and target weighted average cost of capital. (30 marks) 2. Advise the company how the additional R2 million should be raised. All calculations that support your advice must be shown. (6 marks) 3. Comment on the firms existing approach to evaluating proposed investments. (4 marks) 4. Briefly identify sources of long term finance available to the company. (5 marks) 5. Define the term weighted average cost of capital of a company and explain its importance