MediPharm Ltd has optimal capital structure weights of 40% debt and 60% equity. MediPharm is in...

  

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MediPharm Ltd has optimal capital structure weights of 40% debt and 60% equity. MediPharm is in the 30% tax bracket and is evaluating four independent investment proposals. PROJECT INITIAL INVESTMENT A B C D (R) 100 000 200 000 125 000 100 000 INTERNAL RATE OF RETURN (IRR) (%) 17 15 14 11 MediPharm senior financial analyst has gathered the following information: MediPharm can raise R150 000 through the sale of a R1 000 par value, 8% annual coupon rate and a ten-year debenture. The debenture will be issued at 5% discount and R20 flotation cost per debenture. Additional funds will be raised through the bank loan with an after-tax cost of 10%. R375 000 is available through retained earnings. Additional funds will be raised through the issue of new ordinary shares. The company pays a regular dividend of R10, has a growth rate of 3% and nets R87.30 after flotation costs. The flotation costs are calculated at 3% of the par value (R90) of a share. REQUIRED: 1.1 Calculate the WACC associated with each range of financing/break-point. (18 marks) 1.2 In which project do you recommend that the company invest its funds? Give motivation for your choice. (2 marks) MediPharm Ltd has optimal capital structure weights of 40% debt and 60% equity. MediPharm is in the 30% tax bracket and is evaluating four independent investment proposals. PROJECT INITIAL INVESTMENT A B C D (R) 100 000 200 000 125 000 100 000 INTERNAL RATE OF RETURN (IRR) (%) 17 15 14 11 MediPharm senior financial analyst has gathered the following information: MediPharm can raise R150 000 through the sale of a R1 000 par value, 8% annual coupon rate and a ten-year debenture. The debenture will be issued at 5% discount and R20 flotation cost per debenture. Additional funds will be raised through the bank loan with an after-tax cost of 10%. R375 000 is available through retained earnings. Additional funds will be raised through the issue of new ordinary shares. The company pays a regular dividend of R10, has a growth rate of 3% and nets R87.30 after flotation costs. The flotation costs are calculated at 3% of the par value (R90) of a share. REQUIRED: 1.1 Calculate the WACC associated with each range of financing/break-point. (18 marks) 1.2 In which project do you recommend that the company invest its funds? Give motivation for your choice. (2 marks)

Answer rating: 100% (QA)

To calculate the weighted average cost of capital WACC associated with each range of financingbreakpoint to consider the cost of debt cost of equity and the weights of debt and equity in the capital s... View the full answer