Question 3 – Sources of Finance (15 marks) Alpha Innovations is a technology startup company that designs and manufactures innovative medical devices. The company has been doing well since its inception and now, to meet increasing demand, Alpha Innovations needs to expand its production capacity. To finance this expansion, the company needs to raise additional capital. You, as the financial manager, are involved in evaluating the financial situation of the company and proposing a suitable financial strategy. The financial structure of Alpha Innovations is as follows: Equity capital: 1,000,000 shares that were initially issued at a price of $1 each, but which now are currently trading at $1.80. The expected return on equity capital is 10% per annum. Long term debt: $900,000 with an interest rate of 5% per annum. Short term debt: $600,000 with an interest rate of 5% per annum. The corporate tax rate is 30%. Using the WACC rate in (a), briefly explain what this rate represents and measures. If the company, as part of its expansion policy, is considering purchasing production equipment with an annual return of 10%, discuss how the WACC rate can inform this business decision. (4 marks, max 120 words)

Question 3 – Sources of Finance (15 marks)

Alpha Innovations is a technology startup company that designs and manufactures innovative medical devices. The company has been doing well since its inception and now, to meet increasing demand, Alpha Innovations needs to expand its production capacity.

To finance this expansion, the company needs to raise additional capital. You, as the financial manager, are involved in evaluating the financial situation of the company and proposing a suitable financial strategy.

The financial structure of Alpha Innovations is as follows:

Equity capital: 1,000,000 shares that were initially issued at a price of $1 each, but which now are currently trading at$1.80. The expected return on equity capital is 10% per annum. Long term debt: $900,000 with an interest rate of 5Short term debt:$600,000 with an interest rate of 5% per annum. The corporate tax rate is 30%. Using the WACC rate in (a), briefly explain what this rate represents and measures. If the company, as part of its expansion policy, is considering purchasing production equipment with an annual return of 10%, discuss how the WACC rate can inform this business decision.

(4 marks, max 120 words)