Question 2 Active PLC is a leading investment companyin Australia and you the below details relating to the capitalstructure of the company. Information concerning raising newcapital Bonds $1,000 Face value 13% Coupon Rate (Annual Payments)20 Term (Years) $25 Discount offered (required) to sell new bonds$10 Flotation Cost per bond Preference Shares 11% Required rate tosell new preference shares $100 Face Value $3 Flotation cost pershare Ordinary Shares $83.33 Current Market Price $4.00 Discount onshare price to sell new shares $5.40 Flotation Cost per bond $5.002019 - Proposed Dividend Dividend History $4.63 2019 $4.29 2018$3.97 2017 $3.68 2016 $3.40 2015 Current Capital Structure Extractfrom Balance Sheet $1,000,000 Long-Term Debt $800,000 PreferenceShares $2,000,000 Ordinary Shares Current Market Values $2,000,000Long-Term Debt $750,000 Preference Shares $4,000,000 OrdinaryShares Tax Rate 33% Risk Free Rate 5% 3 a) Calculate the costassociated with each new source of finance. The firm has noretained earnings available. b) Calculate the WACC given theexisting weights The financial controller does not believe theexisting capital structure weights are appropriate to minimise thefirm’s cost of capital in the medium term and believes they shouldbe as follows Long-term debt 40% Preference Shares 15% OrdinaryShares 45% c) What impact do these new weights have on the WACC?The firm is considering the following investment opportunity.(2020-2027) Data is as follows Initial Outlay $1,600,000 Upgrade$700,000 End of Year 4 Upgrade - 350,000 Increased sales units perannum - (Year 5-8) Working Capital $45,000 Increase requiredEstimated Life 8 Years Salvage Value $60,000 Depreciation Rate0.125 For tax purposes The machine is fully depreciated by the endof its useful life Other Cash Expenses $60,000.00 Per annum (Years1-4) Other Cash Expenses $76,000.00 Per annum (Years 5-8)Production Costs $0.15 Per Unit Sales price $0.75 Per Unit (Years1-4) Sales price $1.02 Per Unit (Years 5-8) 4 Prior sales estimatesYear Sales 2010 520000 2011 530000 2012 540000 2013 560000 2014565000 2015 590000 2016 600000 2017 610000 2018 615559 2019 6590002020 680000 d) Calculate the Net Present Value, Internal Rate ofReturn and Payback Period The financial controller is consideringthe use of the Capital Asset Pricing Model as a surrogate discountfactor. The risk-free rate is 5 per cent. Year Stock Market ShareIndex Price 2010 2000 $15.00 2011 2400 $25.00 2012 2900 $33.00 20133500 $40.00 2014 4200 $45.00 2015 5000 $55.00 2016 5900 $62.00 20176000 $68.00 2018 6100 $74.00 2019 6200 $80.00 2020 6300 $83.33 e)Calculate the CAPM f) Explain why this figure may differ from thatcalculated above (i.e. Cost of equity – Ordinary Shares)
