DA SILVA Plc’s shares are not traded in any recognized market. Its sole activity is saloon and car hire. It is financed by a combination of 2 million $0.5 ordinary shares and a $1.5 bank loan. Very recently, Mavi’s Plc, a national car hire group offered a total of $5.5 million to acquire equity of DA SILVA Plc. The bid failed because majority of shareholders rejected since they wished to retain control of business, despite believing the offer to represent a fair price for the shares. The bank loan is at a floating rate of 10% p.a. and is secured on various fixed assets. The value of the bank loan is considered to be very close to its nominal value.

DA SILVA Plc’s current capital structure (by market value) represents what has been and is intended to continue to be its target capital structure.

DA SILVA Plc’s management is in the process of assessing a major investment, to be financed from retained earnings, in some new deposits, similar to the business’s existing ones. An appropriate cost of capital is required to this purpose. The dividend growth model has been proposed as a suitable basis for the estimation of equity.

Recent annual dividends per share have been:

Year            $

1                 0.0800

2                 0.0900

3                 0.1050

4                 0.1125

5                 0.1250

6                 0.1350

7                 0.1450

8                 0.1550

Corporation tax rate is expected to be 33% p.a. for the foreseeable future.

Required:

Estimate:

a)      Growth rate, g

b)     Cost of equity, Ke

Answer rating: 100% (QA)

ANSWER Ke1124012 Ke1249 So the estimated cost of equi... View the full answer