FIN3701 Assignment 2 Semester 1 2026 – Due 17 April 2026

Description

FIN3701 ASSIGNMENT 2 2026
DUE 17 APRIL 2026

Oreatli Company’s optimal capital structure consists of 30% debt and 70% equity. The
interest rate on its debt is a constant 12%, while the cost of ordinary share funding from
retained earnings is 15%. The company’s marginal tax rate is 28%. Oreatli has
identified the following investment opportunities:
• Project A: cost = R70 000; IRR = 16,5%
• Project B: cost = R70 000; IRR = 15,2%
• Project C: cost = R40 000; IRR = 12,4%
Project D: cost = R60 000; IRR = 10,1%

1.1 Calculate Oreatli Company’s weighted average cost of capital (WACC).

After-tax cost of debt = 12%×(1−0.28) = 8.64%
WACC 0.30×8.64%) + (0.70×15%)
= 2.592% + 10.5%