Wishbone (Pty) Ltd is a holding company with investments in various industries. Its Directors are currently considering several projects which will increase the range of the business activities underta- ken by Wishbone (Pty) Ltd, the holding company. The Directors would like to use discounted cash- flow techniques in their evaluation of these projects, but as yet no weighted average cost of capital has been calculated. Wishbone (Pty) Ltd has an authorised share capital of 10 million 25 cent ordinary shares, of which 8 million have been issued. The current ex div market price per ordinary share is R1.10, a dividend of RO.10 per share having been paid recently. The company's Project Analyst has established the follow- ing information: I The current long-term gilt yield is 12% per annum. 2 Wishbone's historic beta has been calculated at 1.5. 3 The Johannesburg Stock Exchange market required return is 16%. Extracts from the latest balance sheets for both the group and the holding company are given below. Wishbone (Pty) Ltd consolidated balance sheet R'000 3.000 Wishbone (Pty) Ltd R'000 Issued share capital 3.000 500 Share premium 500 7:400 Reserves 900 Shareholder's funds 10 900 4400 Stabilu 4% irredeemable preference shares 2 800 1400 10% irredeemable debentures 3 600 1 500 12% bank loans 3 200 2000 800 Overdraft 50 Total liabilities R10 400 R4 950 N/A. All debt interest is payable annually, and all the current year's payments will be made shortly. The current market yield on preference shares and debentures is 8% and 14% respectively. The 12% bank loans are not traded on the open market, but the Analyst estimates that the effective pre-tax cost is 2% above overdraft rate (which is currently 14%). The loans are repayable in 5 years. The effective company tax rate is 50%. You are required to: Conly do (a) 4 (c)). (a) Calculate the effective after-tax weighted average cost of capital as required by the Directors. $(20) (b) Outline the fundamental assumptions that are made whenever the weighted average cost of capital of a company is used as the discount rate to evaluate investments in new projects. (c) Discuss what is meant by a 'target WACC'. How should a company decide on how to finance an investment project that has a positive NPV? (5) STY MAX