Lifestyle Foods Ltd is a leading producer of canned foods. The executive committee (EXCO) is considering...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Lifestyle Foods Ltd is a leading producer of canned foods. The executive committee (EXCO) is considering expanding one of its production facilities and needs to weigh its financing options for this project carefully because the industry is very competitive and profit margins are quite low. As a first step in the assessment of this project, the EXCO wants to know the weighted average cost of capital (WACC) of the company. The chairperson of the EXCO has tasked you with this responsibility. The following information is available to you: Source of capital Rand Ordinary shares issued (2 000 000 shares) Retained earnings 8 000 000 1 000 000 12% preference shares 4 000 000 Long-term loan 5 000 000 18 000 000 The company recently paid a dividend of R3.40 per share and according to the annual shareholders' report, the company expects future dividend growth to be 4%. Preference shares are convertible. The long-term loan matures 10 years from today and carries an interest rate of 15.72% per annum. The corporate tax rate is 30%. Required: Round off all calculations to the nearest whole number. 5.1. Calculate Lifestyle's WACC at the current market value. (13) The EXCO has set the company's target debt:equity ratio as 40% debentures, 15% preference shares and 45% equity. Use these ratios to calculate the WACC at target ratios. 5.2. (7) Lifestyle Foods Ltd is a leading producer of canned foods. The executive committee (EXCO) is considering expanding one of its production facilities and needs to weigh its financing options for this project carefully because the industry is very competitive and profit margins are quite low. As a first step in the assessment of this project, the EXCO wants to know the weighted average cost of capital (WACC) of the company. The chairperson of the EXCO has tasked you with this responsibility. The following information is available to you: Source of capital Rand Ordinary shares issued (2 000 000 shares) Retained earnings 8 000 000 1 000 000 12% preference shares 4 000 000 Long-term loan 5 000 000 18 000 000 The company recently paid a dividend of R3.40 per share and according to the annual shareholders' report, the company expects future dividend growth to be 4%. Preference shares are convertible. The long-term loan matures 10 years from today and carries an interest rate of 15.72% per annum. The corporate tax rate is 30%. Required: Round off all calculations to the nearest whole number. 5.1. Calculate Lifestyle's WACC at the current market value. (13) The EXCO has set the company's target debt:equity ratio as 40% debentures, 15% preference shares and 45% equity. Use these ratios to calculate the WACC at target ratios. 5.2. (7)
Expert Answer:
Answer rating: 100% (QA)
51 Computation of WACC for Lifestyle at the current market value Cos... View the full answer
Related Book For
Finance Applications and Theory
ISBN: 978-0077861681
3rd edition
Authors: Marcia Cornett, Troy Adair
Posted Date:
Students also viewed these corporate finance questions
-
A fast growing firm recently paid a dividend of $0.35 per share. The dividend is expected to increase at a 20 percent rate for the next three years. Afterwards, a more stable 12 percent growth rate...
-
The Duo Growth Company just paid a dividend of $1 per share. The dividend is expected to grow at a rate of 25% per year for the next 3 years and then to level off to 5% per year forever. You think...
-
The stock of Ells Electronics Limited recently paid a dividend of $2.00 per share. Dividends are expected to grow at a rate of 5% forever. Based on past returns, this stock's returns have a standard...
-
Determine whether each of these statements is true or false. a) x {x} b) {x} {x} c) {x} {x} d) {x} {{x}} e) {x} f) {x}
-
Which of the two options yields the greatest return on your investment of $2,000? Option 1: 8% annul interest compounded quarterly for four years Option 2: 8 % annul interest compounded annually for...
-
Consider a one-dimensional harmonic oscillator. Can one apply the WKB approximation to it? If so, why, and when?
-
Given the assumption that the energy levels of an harmonic oscillator can take on only the values \(n h v\) and given the Maxwell-Boltzmann distribution of occupation numbers, show that the...
-
On April 8, Darling Company Purchase 65,000 units of raw materials at $7 per unit. On April 20, raw materials were requisitioned for production as follows: 26,000 units for Job 50 at $6 per unit and...
-
In the context of bioseparations, what are the latest advancements in chromatographic techniques for purifying biological products, and how do they address issues of throughput, purity, and...
-
Wells Technical Institute (WTI), a school owned by Tristana Wells, provides training to individuals who pay tuition directly to the school, WTI also offers training to groups in off-site locations....
-
Consider the following data sets collected from a sample: 2, 2, 11, 7, 4, 4, 5, 6, 13, 15, 20, 19. Find the following: a.Arithmetic mean ; b.Median; c. Mode; d.Range; e.Standard deviation; and...
-
Microchip began the year with $2,600 in its asset account, supplies. During the year, $7,100 in supplies were purchased and debited to supplies. At year-end, supplies costing $3,550 remain on hand....
-
According to the Portland Business Journal, Jim Houser, a Portland auto specialist, landed a key Small Business Administration appointment. Help Jim reconcile Remington s Auto Clinic s checkbook and...
-
Garden Depot is a retailer that is preparing its budget for the upcoming fiscal year. Management has prepared the following summary of its budgeted cash flows: Total cash receipts Total cash...
-
Highland, Inc. has new management and wants to improve the balance sheet. They would like to not accrue for bad debt since they are pretty sure there newest and most significant clients will all pay...
-
In 2022, the University of Akureyri has recorded the following costs for two administrative units, property management and quality and human resources together with two teaching fields, health...
-
[20 marks] 1. You measure the length of a metal rod with a ruler marked in mm. The length is between 37 mm and 38 mm, but closer to 38 mm. Write the measurement with the absolute error, and with the...
-
Name some of the various types of financial intermediaries described in the chapter and indicate the primary reason(s) each was created.
-
Jamaica Tours, Inc., started the year with a balance of retained earnings of $1,780 million. The company reported net income for the year of $284 million and paid dividends of $17 million to the...
-
MMK Cos. Normally pays an annual dividend. The last such dividend paid was $2.25, all future dividends are expected to grow at a rate of 7 percent per year, and the firm faces a required rate of...
-
People can become millionaires in their retirement years quite easily if they start saving early in employer 401(k) or 403(b) programs (or even if their employers dont offer such programs)....
-
Most countries in Europe do not have stringent laws to protect whistleblowers. True/false
-
In view of significant financial losses to investors, corporate fraud does not really affect the U.S. economy and investor confidence. True/false
-
The National Crisis Inquiry Report (2011) concluded that the financial crisis was unavoidable. True/false
Study smarter with the SolutionInn App