Mr C Ltd, a clothing retailer, was founded in 1998. In 2007 it was listed on the JSE and the share price is currently trading at R5.40 at the close of the market today. The financial director is concerned that the capital structure is not as efficient as it could be and the company’s capital is too expensive. Mr C’s capital structure is currently as follows:

Source: Book value

• 10 000 000 ordinary shares (R1 each) 10 000 000

• 13% non-redeemable preference shares 6 000 000

• 9% 10 000 000 bonds (debt) 10 000 000

Additional info:

• Ordinary shares

The most recent dividend was 70c per share, and the directors are following an 8% per annum growth policy with regard to dividends. The managing director is of the opinion that they will continue with this policy for the foreseeable future.

• Non-redeemable preference shares

The preference shares currently trade at 80c per share and are convertible at the discretion of the directors.

• Bonds (debt)

Bonds currently trade at 95c each and are redeemable at par in two years’ time.

Coupons are paid annually.

• Assume a corporate tax rate of 28%.

Required

Calculate the cost of:

(a) Equity (4)

(b) Preference shares (4)

(c) Debt (4)

Answer rating: 100% (QA)

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