The management of Tacco (Pty) Ltd is positive about the companys future and has forecast strong growth for the business. To achieve this growth, the company will need to implement a sustained investment programme over the next five years. This programme requires an immediate investment of R1 million in plant and equipment. Management has always evaluated proposed investments at a discount rate of 15%. You are the companys new financial manager. Your first task is to review the companys existing policies for investment evaluation and investment financing. You have obtained the following data to help you with this task: The company has issued 800 000 ordinary shares of R1 each and a dividend of R2 per share has just been paid. Given managements positive outlook, dividends are expected to grow at 15% per annum for the next two years followed by a constant annual growth rate of 8%. The average cost of equity (Ke) for similar listed companies includes a market risk premium of 10%. An appropriate risk premium for Tacco (Pty) Ltd is estimated to be 1.50 times the listed companies market risk premium. The risk-free rate is currently 7%. The companys target capital structure is 65% equity and 35% debt. The company tax rate is 30%, and Tacco (Pty) Ltd is in a tax-paying position. Other sources of long-term capital for Tacco (Pty) Ltd are shown below. Convertible preference shares Tacco (Pty) Ltd has 200 000 convertible preference shares in issue, each with a carrying amount of R20 and a dividend rate of 12% per annum. In two years time, the shareholders have the option to convert each preference share into an ordinary share or to redeem their preference shares at a 20% premium to carrying amount. The current required return for this type of security is 10.5%. Irredeemable debentures Tacco (Pty) Ltd has issued 1 500 debentures with a nominal value of R1 000 each. There is no fixed redemption date and these securities carry a coupon rate of 16% per annum. The current yield-to-maturity for this type of debenture is 15%.

REQUIREMENTS

(a) Calculate the current and target weighted average cost of capital of Tacco (Pty) Ltd (round your calculations to the nearest cent). (16 Marks)

(b). Without doing any further calculations, comment on how you think the company should raise the R1 million required to finance the Namibian project. (2 Marks)

(c). Comment on the companys existing approach to evaluating proposed investments. (6 Marks) (d) List the advantages and disadvantages for Tacco (Pty) Ltd being associated with using debt finance for the Namibian project. (14 Marks)