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Question text

The Value Group (Pty) Ltd has grown from strength to strength, starting with the purchase of Freightpak, on the 1st of March 1999, followed by the acquisition of Rent-a-Bakkie in the late 2000s. The company has a capital structure of 10 000 000 R1 ordinary shares, market price R1, 50. The preference shares are 10 000 000 12% R1 preference shares, market price of R3,50. They have received a bank loan from Investec Bank of 1 500 000 10%. Debentures 1 000 000 at par value 10,5% market price R120 (issued at R100)

In order to equalise the tax effect, the debenture and bank loan interest weighting is reduced by multiplying it by 1 minus the given corporate tax rate (27%).

The current and expected future rate of ordinary share dividends is 9%.

As the Finance and Marketing manager you would like to make crucial capital investment decisions. The board of directors has asked you to:

a) Calculate the overall market value (5)

b) Calculate the overall cost using the Dividend Discount Model (DDM) (5)

c) Calculate the WACC - Weighted average cost of capital (5)

Answers:

a)

Source	Market Value	Proportion

b)