AdvTech Limited is a large firm listed on the Johannesburg Stock Exchange. It has the following capital structure: Convertible Debt – 5 yrs; 8% equals R25 million Preferred Shares – 5% coupon + nominal value of 100 equals R15 million Common Equity (nominal value R 10/share) equals R10 million Retained Earnings R23 million The current dividend for the company is R 50/share and is expected to grow at 3% per year in the foreseeable future. The equity shares trade at R450/share. The preferred shares trade at R 104/share. The convertible debt has a conversion privilege of 2 shares per R1,000 face value at maturity. The debt currently trades at R 950. The firm’s income tax rate is 30% Required: 3.1 Calculate the firm’s weighted average cost of capital (WACC). (13 marks) 3.2 Discuss the firm’s dividend payout policy and whether it has an impact on share price. (6 marks)

Answer rating: 100% (QA)

To calculate the firms weighted average cost of capital WACC we need to consider the costs of each component of its capital structure weighted by their respective market values Cost of Convertible Deb... View the full answer