QUESTION 1Aria Jones has just been appointed as a Chief Financial Officer of Sweet Thing BakeryLtd (Sweet Thing) in February 2020. Upon her appointment she was investigating thefeasibility of an expansion project to the amount of R4 million. This expansion projectwill not only diversify the products Sweet Thing sells, but will also include the upgradeof outdated machinery, expansion of the workforce to help with job creation and theenlargement of the regions in which they sell.However, in March the Corona Virus placed all future plans on hold while the wholeworld was in lockdown. The Covid-19 pandemic has placed enormous strain on theSouth African economy resulting in a significant decrease in the interest rates andother costs of financing. Aria decided to re-evaluate Sweet Thing's Weighted AverageCost of Capital (WACC) before considering any future expansion projects, as the costof capital can be significantly affected due to the change in economic conditions thatwill affect her decision on whether to accept this project or not.Aria obtained the following information in terms of Sweet Thing's Cost of Capital:Extract from Statement of Financial Position:2020EquityOrdinary SharesPreference SharesR4 000 0003 200 000Retained Earnings980 000LiabilitiesDebentures5 000 000Ordinary Shares:Sweet Thing has 3 500 000 ordinary shares in issue. Over the past five years, SweetThing has maintained a stable dividend policy, including a relatively constant growthrate in dividends. This policy is not expected to change significantly in the foreseeablefuture. The following historical information is available regarding the dividendpayments over a five-year period:YearDividends2016R400 0002017R450 0002018R470 0002019R520 0002020R560 000Analyst forecasts based on probability distributions for next year (year 2021) suggestthat the expected return on the market will be 15%,Preference SharesSweet Thing has 32 000, R100 preference shares in issue. The preference dividendis fixed at R7.5 per share and the current market required rate of return for similarpreference shares is 12%.DebenturesSweet Thing has 5 000 9% debentures with a face value of R1 000. These debenturescan be redeemed in 9 years' time at a discount of 5%. The interest on debentures iscompounded semi-annually.Other Relevant Financial Information:Market Yield-to-Maturity for similar Debentures8.75%Beta1.4Tax Rate28%R186 Government Bond (Mature in 2025)6%R208 Government Bond (Mature in 2030)8.5%REQUIRED QUESTIONCalculate the Weighted Cost of Capital (WACC) for SweetThing using market values.Show all calculations clearly. Round all amounts to thesecond decimal point.QUESTION 1

Growth rate: Growth rate =Closing dividendOpening dividend1Number of years-1Growth rate…

Aria Jones has just been appointed as a Chief Financial Officer of Sweet Thing Bakery Ltd (Sweet Thing) in February 2020. Upon her appointment she was investigating the feasibility of an expansion project to the amount of R4 million. This expansion project will not only diversify the products Sweet Thing sells, but will also include the upgrade of outdated machinery, expansion of the workforce to help with job creation and the enlargement of the regions in which they sell. However, in March the Corona Virus placed all future plans on hold while the whole world was in lockdown. The Covid-19 pandemic has placed enormous strain on the South African economy resulting in a significant decrease in the interest rates and other costs of financing. Aria decided to re-evaluate Sweet Thing's Weighted Average Cost of Capital (WACC) before considering any future expansion projects, as the cost

Aria Jones has just been appointed as a Chief Financial Officer of Sweet Thing Bakery Ltd (Sweet Thing) in February 2020. Upon her appointment she was investigating the feasibility of an expansion project to the amount of R4 million. This expansion project will not only diversify the products Sweet Thing sells, but will also include the upgrade of outdated machinery, expansion of the workforce to help with job creation and the enlargement of the regions in which they sell. However, in March the Corona Virus placed all future plans on hold while the whole world was in lockdown. The Covid-19 pandemic has placed enormous strain on the South African economy resulting in a significant decrease in the interest rates and other costs of financing. Aria decided to re-evaluate Sweet Thing's Weighted Average Cost of Capital (WACC) before considering any future expansion projects, as the cost

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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