Fresnillo plc explores and mines gold and silver in Mexico. Fresnillo is a quoted company...
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Fresnillo plc explores and mines gold and silver in Mexico. Fresnillo is a quoted company which has been in operation for a number of years and which is financed largely by equity. The directors are considering expansion plans and have asked for some calculations in order to decide how to raise the necessary finance. In particular, the final decision is to borrow the capital required. The directors are intending to make a general expansion of the existing business and estimate that it will need to raise additional capital of 200. The following information is available: Risk-free rate 2% Equity market return 6% Corporation tax 19% Equity capital 800m Fresnillo plcs beta 1.2 Likely debt interest rate (gross) 4% A. Calculate Fresnillo plcs expected weighted average cost of capital (WACC). (3 marks) B. Calculate Fresnillo plcs expected WACC after borrowing the capital. (7 marks) C. Explain the relevance to the company of minimising its WACC commenting on your answers to parts (A) and (B). (3 marks) D. Explain how the decision to raise finance using either debt or equity might affect the companys WACC.
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