Question 5 Lifestyle Foods Ltd is a leading producer of canned
Question 5 Lifestyle Foods Ltd is a leading producer of canned foods. The executive committee (EXCO)is considering expanding one of its production facilities and needs to weigh its financing optionsfor this project carefully because the industry is very competitive and profit margins are quitelow.As a first step in the assessment of this project, the EXCO wants to know the weighted averagecost of capital (WACC) of the company. The chairperson of the EXCO has tasked you with thisresponsibility.The following information is available to you:Source of capitalRandOrdinary shares issued (2 000 000 shares)8 000 000Retained earnings1 000 00012% preference shares4 000 000Long-term loan5 000 00018 000 000The company recently paid a dividend of R3.40 per share and according to the annualshareholders’ report, the company expects future dividend growth to be 4%. Preference sharesare convertible. The long-term loan matures 10 years from today and carries an interest rateof 15.72% per annum. The corporate tax rate is 30%.Required:Round off all calculations to the nearest whole number.5.1. Calculate Lifestyle’s WACC at the current market value.(13)5.2.The EXCO has set the company’s target debt:equity ratio as 40% debentures, 15%preference shares and 45% equity. Use these ratios to calculate the WACC at targetratios.(7)SBSPage 7 of Assignmentthorn Business Scho
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