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"A set of 6 multiple-choice questions covering various topics in corporate finance and investment, including flotation costs, capital structure, preference shares, weighted average cost of capital (WACC), equity risk premium, and exchange rates. Each question has four possible answers (A, B, C, and...

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  • June 6, 2024
  • 3
  • 2023/2024
  • Other
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SECTION B [40 marks]
QUESTION 2 (15 marks)

Lion Brands Ltd is a South African consumer packaged goods company listed on the JSE.
The company owns restaurants and manufacturing facilities across South Africa. Lion
Brands has recently expanded its operations by venturing into the commercial activity of
transporting goods and services (logistics) unit. The financial director has requested you
to assist with calculating the weighted average cost of capital (WACC). She provided you
with the following financial information:

Extract from the Statement of Financial Position as at 31 October 2022
Notes R
Share Capital (500 000 shares at par value) 1 500 000
Retained Earnings 1 250 700
Debentures at par value 2 10 000 000
Loan (10% interest per annum) 3 750 000

Note 1
The company’s shares were trading at R15.75 per share on 31 October 2022. The
company has a beta of 1.25 and a risk premium of 10%. The market risk premium is 8%
and the JSE averaged a return of 15% per annum over the past two years.

Note 2
The debentures were issued 3 years ago and have a market related return of 8.75%. The
debentures pay interest of 10% annually and are redeemable in 7 years at par.

Note 3
The loan has a market value of R845 000 and it is payable in 6 months’ time. The
company has no plans to replace the loan.

A company tax rate of 27% is applicable.

REQUIRED:

2.1 Calculate the weighted average cost of capital of Lion Brands Ltd. (13)

2.2 Discuss whether Lion Brands can use the weighted average cost of (2)
capital calculated in 2.1 above to evaluate the operations of the
commercial goods and transportation services unit.

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