Wirefront plc is a large company operating in the telecommunications industry. Wirefront plc has grown steadily by employing a strategy of aggressive pricing and competitor acquisitions.

Over the past ten years, in order to finance company acquisitions, Wirefront has had a number of share issuances. Wirefront plc are seeking to acquire a competing company and is considering how to finance this particular acquisition. The target company is valued at approximately 50 million.

Write a report to the Finance Director of Wirefront plc evaluating the appropriate sources of finance that could be used by Wirefront plc for the acquisition and explain the factors that should be considered when choosing the appropriate source of finance.

Total marks (40 marks)

Part (B)

Wirefront plcs management are reviewing its capital structure, details of which are outlined below:

	000
Ordinary Share Capital (50 cent each)	3,000
General Reserve	14,100
8% Redeemable Bonds (2)	20,000
5% Preference Shares (25 cent each)	7,500

- Wirefront plcs ordinary shares are currently trading at an cum-div price of 18.20 per share. An ordinary dividend of 35 cent per share is due to be paid shortly. The company has recently updated its dividend policy to reflect an increase in dividends of 5% per annum for the foreseeable future.

- The preference shares have a market value of 1.48 ex-div each. The preference dividend has recently been paid.

- Wirefront plc bonds are currently trading at 94.80 per cent ex-interest per 100 nominal value and will be redeemed in 5 years time at a premium of 5% of nominal value.

- Wirefront plc pays tax of 20%.

Requirement:

In the report to the Finance Director of Wirefront plc, calculate and show:

a) the current cost of the ordinary shares b) the current cost of the preference shares c) the current cost of the redeemable bonds

d) based on market values, Wirefront plcs weighted average cost of capital

e) As mentioned above, the company are considering further acquisitions. The directors are conscious of issuing further shares and would like to see the impact of further debt of 45 million would have of the companys weighted average cost of capital (WACC). The company would pay interest of 8% on the new debt facility.

In the same report, calculate and show, Wirefront plcs revised market-value weighted average cost of capital based on the Finance Directors proposal above.

Report format, layout and presentation