Question

In: Finance

The present capital sructure is as follows : 1.800,000 R2 ordinary shares now trading at r2,50...

The present capital sructure is as follows :

1.800,000 R2 ordinary shares now trading at r2,50 per share preference

2. 250,000 preference shares trading at r2 per share (isuued at R3 per share).10% fixed rate of interest.

3.Abank loan of R1 500,000 AT 13% p.a (payable over 5 years.

Additional data: the company's beta is 1.3. The return on the market is 14% and the risk fee rate is 7%.

its current tax rate is 28&. its current divided is 40c per share and it expects its dividends to grow by 8%.

You are required to : Assuming that the company uses the Sividend growth model to calculate its cost of equity. Calculate its weighted average cost of capital.

If a further R500,000 is needed to finance te expansion ,which option should they use from eitherr ordinary shares, preference share or loan financing and why?

Please help with the calculations and explain

Expert Solution

MV of equity=Price of equity*number of shares outstanding

MV of equity=2.5*800000

=2000000

MV of Bond=Par value*bonds outstanding*%age of par

MV of Bond=1000*1500*1

=1500000

MV of Preferred equity=Price*number of shares outstanding

MV of Preferred equity=2*250000

=500000

MV of firm = MV of Equity + MV of Bond+ MV of Preferred equity

=2000000+1500000+500000

=4000000

Weight of equity = MV of Equity/MV of firm

Weight of equity = 2000000/4000000

W(E)=0.5

Weight of debt = MV of Bond/MV of firm

Weight of debt = 1500000/4000000

W(D)=0.375

Weight of preferred equity = MV of preferred equity/MV of firm

Weight of preferred equity = 500000/4000000

W(PE)=0.125

Cost of equity

As per DDM

Price = recent dividend* (1 + growth rate )/(cost of equity - growth rate)

2.5 = 0.4 * (1+0.08) / (Cost of equity - 0.08)

Cost of equity% = 25.28

After tax cost of debt = cost of debt*(1-tax rate)

After tax cost of debt = 13*(1-0.28)

= 9.36

cost of preferred equity

cost of preferred equity = Preferred dividend/price*100

cost of preferred equity = 0.3/(2)*100

=15

WACC=after tax cost of debt*W(D)+cost of equity*W(E)+Cost of preferred equity*W(PE)

WACC=9.36*0.375+25.28*0.5+15*0.125

WACC =18.03%

Choose bank loan for further financing as it has lowest cost : 9.36%

jeff jeffy answered 4 months ago

Provide the advantages and disadvantages of both raising capital using ordinary shares and preference shares to...

Provide the advantages and disadvantages of both raising capital using ordinary shares and preference shares to a company.

The capital structure of Minelli Enterprises Limited as at 31 March 2020 is as follows: -Ordinary...

The capital structure of Minelli Enterprises Limited as at 31 March 2020 is as follows: -Ordinary shares (par value $1.50) 60,000 5.5% (post-tax) Preference Shares (par value $2.20) 8,800 6.5% (pre-tax) Bonds semi-annual (par value $1000) 80,000 Term Loan (interest rate 4.25% per annum) 6,500 Additional Information: • The ordinary shares are currently trading at $1.95 while the preference shares are trading at $2.45. • Return on government bonds is 1.25%, the market risk premium 4.25%. A consultant has estimated...

2. Arcarde Ltd issues both ordinary shares and preference shares to raise capital, in which 500,000...

2. Arcarde Ltd issues both ordinary shares and preference shares to raise capital, in which 500,000 ordinary shares have been issued at the price of $10 and 100,000 preference shares with a par value of $100. a. Company promises to pay an annual dividend rate of 6.5% per share for its preference shares. If similar investment has a rate of return of 10% p.a, what is the fair price of Arcarde’s preference share? b. Company also plans to pay dividend...

EcoTop Bhd was incorporated with an authorized capital of RM60,000,000 consisting of RM40,000,000 ordinary shares and...

EcoTop Bhd was incorporated with an authorized capital of RM60,000,000 consisting of RM40,000,000 ordinary shares and RM20,000,000 10% preference shares. The following is the trial balance of the company as at 31 December 2019. Debit Credit RM RM Retained profit as at 1 January 2019 12,640,000 Ordinary share capital 8,400,000 10% preference shares 4,800,000 Freehold land 8,400,000 Building (at valuation) 6,880,000 Plant and machinery (at cost) 8,400,000 Motor vehicle (at cost) 6,720,000 Accumulated depreciation as at 1 January 2019: -...

Explain about the following (i) Ordinary shares (ii) Preference shares (iii) Cost of capital (iv) Weighted...

Explain about the following (i) Ordinary shares (ii) Preference shares (iii) Cost of capital (iv) Weighted average cost of capital (WACC)

Choco Company had the following capital structure at January 1, 2018: Outstanding Ordinary shares, 600,000 shares...

Choco Company had the following capital structure at January 1, 2018: Outstanding Ordinary shares, 600,000 shares $7,200,000 10% stated interest rate convertible bonds issued at par; each $1,000 bond is convertible into 80 ordinary shares $5,000,000 During 2018, Choco had the following share transactions: May 1 Issued 50,000 ordinary shares for $30 per share. Sep. 1 Redeemed 100,000 ordinary shares at $35 per share. Nov. 1 Converted $2,000,000 of bonds. Net income for 2018 was $1,900,000. The income tax rate...

A company’s capital consists of 100 000 ordinary shares issued at $2 and paid to $1...

A company’s capital consists of 100 000 ordinary shares issued at $2 and paid to $1 per share. On 1 September, a first call of 50c was made on the ordinary shares. By 30 September, the call money received amounted to $45 000. No further payments were received, and on 31 October, the shares on which calls were outstanding were forfeited. On 15 November, the forfeited shares were reissued as paid to $1.20 for a payment of $1 per share....

A company's capital consists of 100 000 ordinary shares issued at $2 and paid to $1...

A company's capital consists of 100 000 ordinary shares issued at $2 and paid to $1 per share. On 1 September, a first call of 50c was made on the ordinary shares. By 30 September, the call money received amounted to $45 000. No further payments were received, and on 31 October, the shares on which calls were outstanding were forfeited. On 15 November, the forfeited shares were reissued as paid to $1.50 for a payment of $1 per share....

ABC Limited had offered 500,000 ordinary shares of ksh. 10 each that were payable as follows:...

ABC Limited had offered 500,000 ordinary shares of ksh. 10 each that were payable as follows: On application ksh.4 On allotment Ksh. 5.00 (including premium) On First and final call Ksh 3.00 400 000 applicants were received. All amounts due on allotment and calls were received on due dates except for one member holding 15,000 shares who never paid for the calls. After giving him the time and without success the directors declared the shares for feighted and were later...

ABL shares are currently trading at a price of $33, while HHT shares are trading at...

ABL shares are currently trading at a price of $33, while HHT shares are trading at a price of $48.74. The risk-free rate is 1.22% per year. Using the information above, perform each of the following tasks: Find the Black-Scholes price of the call on ABL with a strike price of $34.59 if there is 6 months until the call expires and the annual standard deviation of the stock price is 20%.