Scribd
Upload
16 views1 page

WACC Tutorial Question 3

BBC Ltd, a leading beverage manufacturer in South Africa, seeks assistance in determining the appropriate Weighted Average Cost of Capital (WACC) for evaluating a potential investment in supplying branded beverages to a political party. The board has provided details on their financing sources, including ordinary shares, preference shares, and redeemable debentures, along with relevant financial metrics and market conditions. They require advice on the WACC rate to use for decision-making as of December 31, 2023.

Uploaded by

danicaleroux
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
16 views1 page

WACC Tutorial Question 3

BBC Ltd, a leading beverage manufacturer in South Africa, seeks assistance in determining the appropriate Weighted Average Cost of Capital (WACC) for evaluating a potential investment in supplying branded beverages to a political party. The board has provided details on their financing sources, including ordinary shares, preference shares, and redeemable debentures, along with relevant financial metrics and market conditions. They require advice on the WACC rate to use for decision-making as of December 31, 2023.

Uploaded by

danicaleroux
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 1

Client query 2 – BBC Ltd

BBC Ltd (‘BBC’) is one of South Africa’s leading independent manufacturers and distributor of a
variety of beverages. BBC has a new board of directors and they have requested your assistance
in the following two matters:
Possible investment in branded beverages
BBC has identified a possible investment opportunity involving supplying a certain political party
branded beverages for the whole year. The board is however unsure on what the appropriate
WACC rate would be on 31 December 2023 (FY2023) that can be used to evaluate this possible
investment and has asked for your assistance in this matter. The following sources of financing
for FY2023 has been provided to you by the board of directors:

Sources of financing as at 31 December 2023 Notes 2023


R’000
Ordinary share capital (25 000 000 Shares) 1 500 000
12% Non-redeemable preference shares 2 66 000
11% Redeemable debentures 3 60 000

Notes:

1. The company’s ordinary shares have a nominal value of R20 per share and the company
makes annual dividend payments to their shareholders. BBC just paid a R2 dividend for
FY2023 and this is expected to grow by 4% in FY2024, 6% in FY2025 and will stabilize at 5%
per annum from FY2026 for the foreseeable future. The company’s share price is 80% more
volatile in comparison to other companies listed on the JSE. The market return is 11% and
the return on R430 RSA government bonds that mature in 2032, is currently 8%.
2. BBC currently has 550 000 12% non-redeemable preference shares in issue. Similar
preference shares are currently trading in the market at R115 per share. If BBC decides to
issue additional preference shares, transaction costs of 3% of the issue price will be incurred.
3. BBC issued redeemable debentures at a nominal value of R80 per debenture. Interest is paid
quarterly, and the debentures are redeemable in five years time at a premium of 15%. Similar
debentures earn interest of 12% per annum compounded quarterly.
Additional information:

• The current income tax rate for companies in South Africa is 27%.

REQUIRED QUESTION 2 Marks


Subtotal Total
Client Query 2 – BBC Ltd
(c) Advise the directors of BBC on an appropriate WACC rate to 12 12
use for decision-making. You may assume the optimal capital
structure is reflected by market values.

You might also like