QUESTION $2$

$[15$ marks$]$

The power systems company Raging Volts is currently $70\%$ equity financed and aims to raise R$2$ million

to fund a set of attractive investment opportunities. Debt financing may be obtained at an after$-$tax cost

of $16\%.$ The company's management wants to introduce $40\%$ debt in the capital structure while keeping

the cost of each financing source together with its market value the same.

Ordinary shares are currently selling for R$30$ per share. The company paid a dividend $($Do$)$ of R$1,50$ per

share in the previous financial year and had a growth rate of $7\%$ over the past few years. It is expected

that this growth rate will be maintained in future. The company's tax rate is $29\%.$ The market value of

power systems company Volts is R$2000000.$

REQUIRED:

$1\mathrm{.}1$ Calculate the component costs associated with capital investment financing.

$(3$ marks$)$

$2\mathrm{.}2$ Calculate the weighted average cost of capital $($WACC$),$ the break$-$point of equity and the

break$-$point of debt under the current structure.

$(4$ marks$)$

$2\mathrm{.}3$ Calculate the WACC, the break$-$point of equity and the break$-$point of debt under the

proposed structure.

$(4$ marks$)$

$2\mathrm{.}4$ Calculate the number of shares under the current structure.

$(2$ marks$)$

$2\mathrm{.}5$ Calculate the number of shares under the proposed structure.

$(2$ mark$)$