Question Two $(50$ Marks$)$

ZamFoods Ltd$.$ is a Lusaka$-$based Agro$-$processing company listed on the Lusaka Securities Exchange $($LUSE$).$ The company is considering a major capital investment in cassava$-$processing machinery to scale up its production for export markets. Before making a decision, management wants to evaluate the project using the company's current Weighted Average Cost of Capital $($WACC$)$ as the discount rate.

ZamFoods Ltd$.$ is financed through a mix of equity and long$-$term bonds. The firm has $50$ million ordinary shares outstanding, each trading at ZMW $80$ on the LUSE. The equity beta of the firm is estimated at $1,15.$ based on recent market data. The risk$-$free rate in Zambia, based on $10-$year government bond yields, is currently $5\%,$ and the market risk premium is estimated at $9\%.$

In addition to equity, ZamFoods has issued ZMW $1$ billion in bonds, which currently trade at $110$ per $100$ face value. These bonds have a $9\%$ annual coupon rate paid semi$-$annually and mature in $15$ years. The company's marginal corporate income tax rate is $40\%$

I. Calculate the market value of equity and debt. $(5$ Marks$)$

II$.$ Determine the proportion of debt 'and equity in the company's capital structure. $(5$ Marks$)$

III. Estimate the cost of equity. $(5$ marks$)$

IV$.$ Compute the after$-$tax cost of debt. $(10$ Marks$)$

V$.$ Calculate ZamFoods Ltd$.\text{'}$s Weighted Average Cost of Capital $($WACC$).(10$ Marks$)$

VI$.$ Which component debt or equity has a larger effect on the WACC? $(5$ Marks$)$

VII. How might the WACC change if the firm increases its debt ratio? $(5$ Marks$)$

VIII. What strategic recommendations would you make to ZamFoods' Chief Financial Officer $($CFO$)$ to lower the WACC, especially in the Zambian financial environment? $(5$