WATERWORKS Ltd is a public company that is listed on the Johannesburg Stock Exchange. WATERWORKS Ltd is one of South Africa's largest water pipes production and installation companies that focuses on manufacturing and installation of new waterpipes as well as the replacement of existing waterpipes. Substantial capital investment is required between manufacturing and installation of the pipes and receiving payment for the completed installations. The company therefore requires substantial borrowings and equity finance to support its operations. Recently, WATERWORKS Ltd management appointed consultants to review their current capital structure and gearing ratio. The consultants recommended that the company should decrease its gearing. Their opinion is that it would decrease the weighted average cost of capital (WACC) and therefore increase the company's value. After an in-depth research of the industry and WATERWORKS Ltd's historic performance, the consultants estimated that the optimum gearing level (debt / (debt plus equity)) for WATERWORKS Ltd is around 50%, therefore, the optimal capital structure being 50%:50%. Other information - Ordinary share capital consists of 20 million shares in issue. The shares are currently trading on the JSE at R15,53 per share. - Dividend paid to shareholders for the year was R3,00 per share, and this is expected to grow at 7,5% per year. - Long-term debt finance consists of: >400000 debentures issued at a nominal value of R100 per debenture bearing interest at 12% per annum. The debentures are redeemable after eight years at nominal value. The current market return for similar debentures with a life of eight years is 10% (before tax). - Long-term loans which currently incur interest of 10% per annum. Current JIBAR rate for similar loans is 10% pre-tax. - The current corporate tax rate in South Africa is 28%. f) Calculate the current weighted average cost of capital (WACC) of WATERWORKS Ltd before the advice of the consultants will be applied. You can use either the mathematical formula or the table format. [Show all workings and round your final answer to two decimal places.] g) Calculate what the weighted average cost of capital (WACC) of WATERWORKS Ltd will be if they take the advice of the management consultants to work towards the optimum capital structure of 50%:50%. Assume that cost of equity and cost of debt will remain the same. (3) WATERWORKS Ltd is a public company that is listed on the Johannesburg Stock Exchange. WATERWORKS Ltd is one of South Africa's largest water pipes production and installation companies that focuses on manufacturing and installation of new waterpipes as well as the replacement of existing waterpipes. Substantial capital investment is required between manufacturing and installation of the pipes and receiving payment for the completed installations. The company therefore requires substantial borrowings and equity finance to support its operations. Recently, WATERWORKS Ltd management appointed consultants to review their current capital structure and gearing ratio. The consultants recommended that the company should decrease its gearing. Their opinion is that it would decrease the weighted average cost of capital (WACC) and therefore increase the company's value. After an in-depth research of the industry and WATERWORKS Ltd's historic performance, the consultants estimated that the optimum gearing level (debt / (debt plus equity)) for WATERWORKS Ltd is around 50%, therefore, the optimal capital structure being 50%:50%. Other information - Ordinary share capital consists of 20 million shares in issue. The shares are currently trading on the JSE at R15,53 per share. - Dividend paid to shareholders for the year was R3,00 per share, and this is expected to grow at 7,5% per year. - Long-term debt finance consists of: >400000 debentures issued at a nominal value of R100 per debenture bearing interest at 12% per annum. The debentures are redeemable after eight years at nominal value. The current market return for similar debentures with a life of eight years is 10% (before tax). - Long-term loans which currently incur interest of 10% per annum. Current JIBAR rate for similar loans is 10% pre-tax. - The current corporate tax rate in South Africa is 28%. f) Calculate the current weighted average cost of capital (WACC) of WATERWORKS Ltd before the advice of the consultants will be applied. You can use either the mathematical formula or the table format. [Show all workings and round your final answer to two decimal places.] g) Calculate what the weighted average cost of capital (WACC) of WATERWORKS Ltd will be if they take the advice of the management consultants to work towards the optimum capital structure of 50%:50%. Assume that cost of equity and cost of debt will remain the same. (3)
