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Tufa Co (Sep/Dec 17)

The following statement of financial position information relates to Tufa Co, a company listed on a large stock market which pays corporation tax at a rate of 30%.

 $m$m Equity and liabilities Share capital 17 Retained earnings 15 Total equity 32 Non-current liabilities Long-term borrowings 13 Current liabilities 21 Total liabilities 34 Total equity and liabilities 66

The share capital of Tufa Co consists of $12m of ordinary shares and$5m of irredeemable preference shares.

The ordinary shares of Tufa Co have a nominal value of $0.50 per share, an ex dividend market price of$7.07 per share and a cum dividend market price of $7.52 per share. The dividend for 20X7 will be paid in the near future. Dividends paid in recent years have been as foIlows:  Year 20X6 20X5 20X4 20X3 Dividend ($/share) 0.43 0.41 0.39 0.37

The 5% preference shares of Tufa Co have a nominal value of $0.50 per share and an ex dividend market price of$0.31 per share.

The long-term borrowings of Tufa Co consists of $10m of loan notes and a$3m bank loan. The bank loan has a variable interest rate.

The 7% loan notes have a nominal value of $100 per loan note and a market price of$102.34 per loan note. Annual interest has just been paid and the loan notes are redeemable in four years' time at a 5% premium to nominal value.

Required

A. Calculate the after-tax weighted average cost of capital of Tufa Co on a market value basis
B. Discuss the circumstances under which it is appropriate to use the current WACC of Tufa Co in appraising an investment project.
C. Discuss THREE advantages to Tufa Co of using convertible loan notes as a source of longterm finance.