SAND Ltd (SAND) is a public company that is listed on the Johannesburg Stock Exchange. SAND...

   

Transcribed Image Text:

SAND Ltd (SAND) is a public company that is listed on the Johannesburg Stock Exchange. SAND is one of South Africa's largest residential construction companies that focuses on apartment buildings and townhouses, Substantial capital investment is required between purchasing the land for development and receiving payment for the houses. SAND therefore requires a great amount of borrowings and equity finance to support its operations. From 2008, property prices have risen steadily, and the construction industry has performed well. This enabled SAND to reduce its dependence on debt finance Recently, management consultants appointed by SAND recommended that the company should decrease its gearing. Their opinion is that it would decrease the weighted average cost of capital (WACC) and therefore increase the company's value After in-depth research of the industry and SAND's historic performance, the consultants estimated that the optimum gearing level (debt / (debt plus equity)) for SAND is around 50% Ordinary share capital Long-term debt finance Non-distributable reserves Retained income R10 000 000 R50 000 000 R2 600 000 R7 200 000 Other information • Equity finance consists of 10 million shares in issue. The shares are currently trading on the JSE at R15,53 per share. • Dividend paid to shareholders for the year was R3,00 per share, and this is expected to grow at 7,5% per year. Debt finance consists of > R40 million worth of R120 debentures currently trading at R125 and a yield of 12%. The debentures are redeemable aher eight years at face value. (The current market return for similar debentures with a life of eight years is 10% before tax) > Long-term loans which currently incur interest of 10% per annum, • The current corporate tax rate in South Africa is 28% REQUIRED a) Calculate the current capital structure of SAND Ltd. b) Calculate the market value of equity. c) Calculate the cost of equity by using the dividend growth model d) Calculate the after-tax cost of debentures. 11 (2) (1) [TURN OVER] Calculate the weighted average cost of capital (WACC) of SAND Lid You can use either the mathematical formula or the table format. Show all workings and final answer to two decimal places. (3) MAC2602 OCT/NOV 2020 g) Calculate what the weighted average cost of capital (WACC) of SAND Lid will be if the advice of the management consultants. [Assume that cost of equity and cost of debt will remain the same.] e) Calculate the current market value of debentures. You may use either themathematical formula or the financial calculator. Show the formula used (mathematical formula) as well as detailed calculations or all the financial calculator inputs [Round your final answer to the nearest rand.] (6) B SAND Ltd (SAND) is a public company that is listed on the Johannesburg Stock Exchange. SAND is one of South Africa's largest residential construction companies that focuses on apartment buildings and townhouses, Substantial capital investment is required between purchasing the land for development and receiving payment for the houses. SAND therefore requires a great amount of borrowings and equity finance to support its operations. From 2008, property prices have risen steadily, and the construction industry has performed well. This enabled SAND to reduce its dependence on debt finance Recently, management consultants appointed by SAND recommended that the company should decrease its gearing. Their opinion is that it would decrease the weighted average cost of capital (WACC) and therefore increase the company's value After in-depth research of the industry and SAND's historic performance, the consultants estimated that the optimum gearing level (debt / (debt plus equity)) for SAND is around 50% Ordinary share capital Long-term debt finance Non-distributable reserves Retained income R10 000 000 R50 000 000 R2 600 000 R7 200 000 Other information • Equity finance consists of 10 million shares in issue. The shares are currently trading on the JSE at R15,53 per share. • Dividend paid to shareholders for the year was R3,00 per share, and this is expected to grow at 7,5% per year. Debt finance consists of > R40 million worth of R120 debentures currently trading at R125 and a yield of 12%. The debentures are redeemable aher eight years at face value. (The current market return for similar debentures with a life of eight years is 10% before tax) > Long-term loans which currently incur interest of 10% per annum, • The current corporate tax rate in South Africa is 28% REQUIRED a) Calculate the current capital structure of SAND Ltd. b) Calculate the market value of equity. c) Calculate the cost of equity by using the dividend growth model d) Calculate the after-tax cost of debentures. 11 (2) (1) [TURN OVER] Calculate the weighted average cost of capital (WACC) of SAND Lid You can use either the mathematical formula or the table format. Show all workings and final answer to two decimal places. (3) MAC2602 OCT/NOV 2020 g) Calculate what the weighted average cost of capital (WACC) of SAND Lid will be if the advice of the management consultants. [Assume that cost of equity and cost of debt will remain the same.] e) Calculate the current market value of debentures. You may use either themathematical formula or the financial calculator. Show the formula used (mathematical formula) as well as detailed calculations or all the financial calculator inputs [Round your final answer to the nearest rand.] (6) B

Answer rating: 100% (QA)

a Calculate the current capital structure of SAND Ltd Total Equity Ordinary Share Capital Nondistributable Reserves Retained Income Total Equity R2600000 R0 R7200000 Total Equity R9800000 Total Debt L... View the full answer