QUESTION THREE

Ziggy Ltd has $1000000$ shares in issue and is currently paying a dividend of R$2$ per share with a

growth of $5\%.$ The shareholders require a rate of return of $24\%.$ The preference shares have no

conversion rights and carry a dividend pay$-$out ratio of $15\%.$ Similar preference shares are currently

trading at $12\%.$ The long$-$term loan matures in $10$ years and carries an interest rate of $16\%.$ Current

long$-$term interest rates for a similar loan are $18,34\%.$ Bank overdraft rate is $20\%$ and the tax rate is

$40\%.$

Ordinary issued shares

Non$-$distribuable reserves

Retained income

Irredeemable preference shares

Long$-$term loans

Bank overdraft

Deferred taxation

R $5000000$

R $600000$

R $400000$

R$2000000$

R$1000000$

R $300000$

R $600000$

Required:

$3\mathrm{.}1$ Calculate the WACC at market value.

$3\mathrm{.}2$ Calculate the target WACC if the optimal debt to equity ratio is ordinary shares $60\%,$

preference shares $20\%$ and long$-$term loans $20\%.$