Sasol is a major South Africa energy and chemicals group. It mines coal and produces liquid fuels and chemical products. The group also produces gas and oil. Sasol is the largest producer of synthetic fuels in the world with sales of over R181 billion. In the 2013 integrated report, Sasol indicated that its weighted average cost of capital (WACC) is 12.95% in South Africa, 8% - 11.2% in Europe and 8% in the USA. Sasol’s share price appreciated strongly in 2013 and early 2014 before falling significantly at the end of 2014 due to the collapse in oil prices. Sasol reported that the volatility of financial markets, the lack of liquidity and the increase in the cost of debt affected the company’s cost of capital. (a) Why should the weighted average cost of capital (WACC) be used to evaluate the required return on a project? (i) Calculate the WACC from the following, using two different approaches to calculate the weighting factors (using balance sheet values and market value). Balance Sheet Extract from Sasol Capital Balance Sheet Value Market Value Ordinary shares (20,000 – 50p ordinary) R10,000 R1.72 8% preference shares R5,000 R0.98 per R1 (£1 nominal value) Long-term liabilities 10% debentures R7,500 R1.04 per R1 The cost of equity has been calculated at 9.5 per cent. The corporation tax rate is 30 per cent.
Sasol is a major South Africa energy and chemicals group. It mines coal and produces liquid fuels and chemical products. The group also produces gas and oil. Sasol is the largest producer of synthetic fuels in the world with sales of over R181 billion. In the 2013 integrated report, Sasol indicated that its weighted average cost of capital (WACC) is
12.95% in South Africa, 8% - 11.2% in Europe and 8% in the USA. Sasol’s share price appreciated strongly in 2013 and early 2014 before falling significantly at the end of 2014 due to the collapse in oil prices. Sasol reported that the volatility of financial markets, the lack of liquidity and the increase in the cost of debt affected the company’s cost of capital.
(a) Why should the weighted average cost of capital (WACC) be used to evaluate the required return on a project?
(i) Calculate the WACC from the following, using two different approaches to calculate the weighting factors (using balance sheet values and market value).
Balance Sheet Extract from Sasol
Capital Balance Sheet Value Market Value
Ordinary shares
(20,000 – 50p ordinary) R10,000 R1.72
8%
(£1 nominal value)
Long-term liabilities 10% debentures R7,500 R1.04 per R1
The
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