Case Study – Part B (13 marks in total) It is now October 2025 Thea Lynch has missed the cruising life. Now that there has been a recovery from the pandemic of 2020 to mid 2021, cruising has made a remarkable recovery, and Thea is taking up a senior role in BlueSeas Exclusive Ocean Holidays. She has sold her business to a listed company, Frances Ellen Ltd, trading as Frances Ellen. Frances Ellen already manages 300 cafes around Australia, most of which are in holiday and tourist locations. Frances Ellen is taking over the management of Café Rowena, and also Café Honora. This latter café is in the seaside area of Honora Cliffs, located about 10 kilometres for Port Andrea, and TLC took over its management in mid 2024. Frances Ellen expects to win tenders to manage some other local cafes in the next few years. Given the distance of Port Andrea from locations where Frances Ellen is already managing cafes, Frances Ellen needs to establish itself in the locality. It needs a commercial kitchen with some office space as well. Frances Ellen Ltd. has already spent $5,000 in evaluating various possible facilities and locations for the purpose. Frances Ellen has narrowed the choice to two options Both of these premises are located in local shopping centers with option 1 being a more high-end centre. Option 1 involves renting a space that is already a commercial kitchen with some suitable office space attached. What is available is larger than Frances Ellen really needs, but all the essential equipment is already in place and is in good order. The terms are for a three year lease with the initial rent for the year 1 January 2026 to 31 December 2026 being $70,000. Insurance for the year 1 January 2026 to 31 December 2026 would be $3,000 paid in advance. In addition, being part of a shopping centre, Frances Allen needs to pay applicable management fees and contribute towards promotion contributions. This cost is estimated to be $4000 for the first year. This cost is treated as an operating cost and assumed to be paid at the end of the year. An injection of $5,000 working capital for the life of the project would be required. Option 2 involves renting a space that would need to be set to be a commercial kitchen with a small adjoining office area. This space is of an optimal size and can be rented for $52,000 for the year 1 January 2026 to 31 December 2026. The lease agreement must be for five years. For option 2, equipment to the value of $25,000 would need to be purchased. Site preparation would cost $3000 and installation of the equipment would cost $2000. Thus, to have the equipment working would cost $30,000 This amount is considered a capital expenditure and needs to be depreciated to zero over 5 years. If option 2 is chosen, the insurance would cost $12,000 for the first 12 months. A support contract for the equipment would be taken out with an initial annual fee of $1,870. This support feee needs 19 to be paid in advance. Like Option 1, the estimated management fee and promotion contribution is estimated to be $2,503 for the first year. An injection of $7,000 working capital for the life of the project would be required. Frances Ellen would sell the equipment at the end of the lease for $4,000. The effective corporate income tax rate is 25%. The inflation rate can be assumed to be 2% per annum. The operating costs are subject to inflation and it may also be assumed that the entire amount of working capital is released again at the termination of the projects. The market value of the Equity shares of Frances Ellen is estimated to be $96 million. For its financial year ended on 30th September 2025, Frances Ellen just paid a dividend of $0.48 per share. The company has observed a consistent growth rate of 6% in the most recent years, and also that its shares are trading now at an average price of $7.25. Frances Ellen’s debt has three components. There is a secured loan, an unsecured loan and a placement of bonds. The secured loan is for $17.6m, with an interest rate of 4.5% compounding every six months. The unsecured loan is for $4.8million with an interest rate of 7.5% compounding daily. Frances Ellen has on issue 25,000 bonds, each bond having a face value of $1,000. The market value of the bonds is $25.6m with maturity on 30 September, 2030. The company pays a constant coupon amount for these Bonds on 31st March and 30th September each year. A coupon payment of $30 was made on 30 September 2025 (i.e. a few days ago). Part B – Two questions to be answered: (While these questions may be solved in Excel, they must also be presented properly in a Word/Pdf document ) 1. With the given information regarding the sources of funds, estimate the Weighted Average Cost of Capital (WACC) for Frances Ellen Ltd. (5 marks) 2. Using the WACC you have established for Frances Ellen Ltd (round it to the nearest integer), undertake an NPV analysis of the two alternatives Frances Ellen Ltd has regarding the rent of commercial kitchen facilities. (8 marks) (5 + 8 = 13 marks)