In: Finance
Royta Ltd, operates
in the commercial painting industry. They have reluctantly come to
the conclusion that...
Royta Ltd, operates
in the commercial painting industry. They have reluctantly come to
the conclusion that some of their older equipment is reaching the
end of its productive life and will need to be replaced sooner or
later. They have asked for your assistance in determining their
cost of capital in order to make this decision.
Their present capital structure is as
follows:
- 1 200 000 R2 ordinary shares now trading at R2,20 per
share.
- 80 000 preference shares trading at R1.80 per share (issued at
R2 per share). Interest at 10% p.a.
- A bank loan of R 1 000 000 at 10.5% p.a. (payable in 3 years
time)
Additional
data
- The company’s beta is 1.4. A return on market of 12% is
accepted and a risk free rate of 7% is applicable.
- The current tax rate is 30%
- The company’s current dividend is 43c per share and they expect
their dividends to grow by 7% p.a.
Required:
- Assuming that the company uses the CAPM to calculate its cost
of equity. Calculate its weighted average cost of capital.
- A further R800 000 is needed to finance the expansion. Which
option should they use (from ordinary shares, preference shares or
loan financing)? Provide a reason for your answer.
NB: Please show all workings and calculations and using
the table format to input your answers.
Step1: List Share Step 2: Market Value Step3: Cost(%)
Step4:Weightling Step5: Cost of Capital
o/s ? xxx ? % ? % ? % ?
p/s ? xxx ? % ? % ? % ?
Loans ? xxx ? % ? % ? % ?
debentures ? xxx ? % ? % ? % ?
xxx ? xxx ?