AngloGold Ashanti is a gold mining Company. It is currently financed by a

mixture of debt and equity as follows:

s

million ordinary shares

Retained earnings

irredeemable debentures

Loan repayable in at fixed interest rate

The market price of ordinary shares is and the debentures have a market

price of The company pays corporation tax at a rate of The current

return on government securities is the average stock market rate of return

is and the company has a beta value of

An opportunity has arisen to acquire Barrick Gold Plc a small company

operating in the same industry. The gold reserves are forecasted to last for

years. The expected cash flow that Barrick Gold Plc will generate is

in the first year following acquisition. This figure is expected to decline by

Pa for each of the next four years, after which it will stagnate at

until the gold reserves are fully depleted

Barrick Gold Plc has ordinary shares currently trading on the stock

market at a price of pence each. It also has debt of

The directors of AngloGold Ashanti Plc use the companys weighted average

cost of capital to appraise investment opportunities.

Required:

State the factor affecting the cost of capital

Calculate AngloGold Ashanti Plc weighted average cost of capital WACC With reasons, comment whether AngloGold Ashanti Plc should purchase

Barrick Gold Plc

State any assumptions that you have made in arriving at your answers to parts

Answer rating: 100% (QA)

Factors affecting the cost of capital include Riskfree rate The riskfree rate represents the minimum required return an investor would expect for investing in a security with no default risk In this c... View the full answer