QUESTION 4 Madiba Ltd’s optimal capital structure calls for 35% debt and 65% equity. The after-tax cost of debt is 12%; its cost of ordinary shares funding from retained earnings is 14%; and its...

QUESTION 4

Madiba Ltd’s optimal capital structure calls for 35% debt and 65% equity. The after-tax cost of debt is 12%; its cost of ordinary shares funding from retained earnings is 14%; and its marginal tax rate is 28%. Madiba Ltd’s has the following investment opportunities:

Supersonic:     Cost = R 50 000; IRR = 11.90%.

Telefunken:   Cost = R100 000; IRR = 13.00%

LG:                Cost = R150 000; IRR = 14.50%.

Sony:            Cost = R200 000; IRR =15.70%.

Madiba expects to have a net income of R250 000 and bases its dividend payment on the residual policy.