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Snug and Comfort Ltd (S&C) is a manufacturer of various household appliances and furniture items. S&C is planning on launching a new furniture range which

Snug and Comfort Ltd (S&C) is a manufacturer of various household appliances and furniture items. S&C is planning on launching a new furniture range which will be financed from the entitys general pool of funds. Consequently, S&C needs to determine the entitys weighted average cost of capital to evaluate whether the new furniture range will contribute to shareholders wealth or lead to depletion.

The following information on S&C has been gathered:

The new furniture range will require an investment of funds to the value of R6 850 000.

R25 000 000 worth of finances have been raised from S&Cs ordinary shares.

11.75% cumulative, redeemable preference shares are in issue which carries a required rate of return of 11.52%. These preference shares contribute R10 000 000 of funds to the entity.

11.90% non-cumulative, non-redeemable preference shares with a cost of finances of 12.2% contribute R3 340 000 funding to S&C.

S&C has a beta of 1.29 while the return S&Cs industry indicates a return offered of 11.88%.

South African long-term government bonds reward a return of 10.5%.

All rates provided above are pre-tax consequences and the South African Income Tax rate for companies is 27%.

REQUIRED: Assist Snug and Comfort Ltd in determining the entitys weighted average cost of capital. .

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