Stardom Manufacturing Company (SMC) is in the construction industry for many years.

Recently, the issue of financing has been raised since the company is concerned about additional

financing of the company and the sources of funding. A recent audit of the companys financial

position has indicated the following details:

1. The company has acquired a bond at face value with an interest rate of 10%.

2. The can issue new Preference shares at $7.50 per share and offer dividend of $75 per

share.

3. The ordinary shares of Stardom has a market value of $60 per share and the firm is

expecting to pay dividend of $4.50 per share one year later with anticipated growth rate

of dividend of 6%.

4. The companys tax rate is 40%.

TASK 1: using the above information help the financial controller to calculate:

a) The cost of Debt financing after tax. (2 marks)

b) The cost of Ordinary Share financing. (5 marks)

c) The cost of Preference Shares financing. (3 marks)

TASK 2: Using information above, what is the weighted average cost of capital (WACC) if

Stardoms capital structure is as follows?

55 % Debt financing

40 % Equity Financing

5 % Preference share financing (6 marks)

TASK 3: Stardom has an option to restructure its financing and is advised to use the following

capital structure instead:

35% Debt financing

55% Equity financing

10 % Preference Shares financing

What would be the new WACC if this advice is executed. (6 marks)

TASK 4: Provide THREE possible reasons for the difference in WACC calculated in TASK2

TASK 5:

WOPPERS PLC, which currently has negligible cash holdings, expects to have to make a series

of cash payments totalling $3 000 000 over the forthcoming year. These will become due at a

steady rate and can be met by making periodic sales from existing holdings of short-term

securities. According to the companys financial advisors, the most likely average percentage

rate of return on these securities is 9% over the forthcoming year, although this estimate is highly

uncertain. Whenever the company sells securities, it incurs a transaction fee (T) of $50.

I. Calculate the optimal cash balance for the company

II. What is the optimal number of times Welders should sell securities?

III. . Determine the cost of holding cash resulting from this policy.

IV. How would you evaluate this approach to cash management?