Mukuru Fashions Ltd is a is a company that specialises in Men's wear. It is based...

  

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Mukuru Fashions Ltd is a is a company that specialises in Men's wear. It is based in Sandton City in Gauteng province. All its branches are in Gauteng The company would like to expand to other provinces. Currently, the company would like to establish branches in the Western Cape province. Recently, in a strategic planning meeting, the management has been planning to raise finance for this expansion. An extract from the statement of financial position (Balance Sheet) is given below as follows: Extract of the statement of financial position as at 28 February 2023 Capital employed Share capital Ordinary shares (250 000 @ R2 each) Non distributable reserves R500 000 60 000 130 000 200 000 100 000 30 000 Retained income Preference shares (200 000 preference shares of R1 each) Long-term loans Bank overdraft Ordinary shares Mukuru has an authorised share capital of 500 000 ordinary shares. The company paid a dividend of R1,50 per share in the previous year. The earnings have been growing at a constant rate of 8% per year for the past five years. A dividend cover of 4 has been maintained for the previous five years. This dividend cover is expected to be maintained for the foreseeable future. Flotation costs for a new share issue are expected to be 10% of the price of such an issue. Preference shares Preference shares carry a dividend pay-out ratio of 16 %. They have no conversion rights. All the dividends have been paid up to date. Similar preference shares have a market pay-out ratio of 14%. Issuing costs per new preference share will be R0,10 Long term loan The long-term loan carries an interest rate of 12% per year. Any new loans incurred will carry an interest rate of 13%. Bank overdraft The current prime bank overdraft rate is 10,5%. Mukuru pays a premium of 5% on prime. The bank overdraft is used to finance movements in debtors and inventory. The taxation rate is 28%. Required: (a) Calculate the current cost of capital at market values [6 marks] (b) Determine the marginal weighted average cost of capital at market values (assume a market value of R1,20 per preference share) [6 marks] (c) Use the following information to determine the targeted cost of capital [4 marks] Beta coefficient 0.75 Market risk premium 8% Risk-free rate 9% Interest on the company's new long-term borrowing 13% Target debt to equity ratio 30% No preference shares in issue (d) Discuss which cost of capital rate should be used for appraising any expansion plan [3 marks] (e) Discuss the problems of estimating the weighted average cost of capital when the bank overdraft is used as a source of long-term finance [4 marks] (f) Briefly discuss the factors that would prohibit the issue of new ordinary shares to fund the business. [2 marks] . ● . Mukuru Fashions Ltd is a is a company that specialises in Men's wear. It is based in Sandton City in Gauteng province. All its branches are in Gauteng The company would like to expand to other provinces. Currently, the company would like to establish branches in the Western Cape province. Recently, in a strategic planning meeting, the management has been planning to raise finance for this expansion. An extract from the statement of financial position (Balance Sheet) is given below as follows: Extract of the statement of financial position as at 28 February 2023 Capital employed Share capital Ordinary shares (250 000 @ R2 each) Non distributable reserves R500 000 60 000 130 000 200 000 100 000 30 000 Retained income Preference shares (200 000 preference shares of R1 each) Long-term loans Bank overdraft Ordinary shares Mukuru has an authorised share capital of 500 000 ordinary shares. The company paid a dividend of R1,50 per share in the previous year. The earnings have been growing at a constant rate of 8% per year for the past five years. A dividend cover of 4 has been maintained for the previous five years. This dividend cover is expected to be maintained for the foreseeable future. Flotation costs for a new share issue are expected to be 10% of the price of such an issue. Preference shares Preference shares carry a dividend pay-out ratio of 16 %. They have no conversion rights. All the dividends have been paid up to date. Similar preference shares have a market pay-out ratio of 14%. Issuing costs per new preference share will be R0,10 Long term loan The long-term loan carries an interest rate of 12% per year. Any new loans incurred will carry an interest rate of 13%. Bank overdraft The current prime bank overdraft rate is 10,5%. Mukuru pays a premium of 5% on prime. The bank overdraft is used to finance movements in debtors and inventory. The taxation rate is 28%. Required: (a) Calculate the current cost of capital at market values [6 marks] (b) Determine the marginal weighted average cost of capital at market values (assume a market value of R1,20 per preference share) [6 marks] (c) Use the following information to determine the targeted cost of capital [4 marks] Beta coefficient 0.75 Market risk premium 8% Risk-free rate 9% Interest on the company's new long-term borrowing 13% Target debt to equity ratio 30% No preference shares in issue (d) Discuss which cost of capital rate should be used for appraising any expansion plan [3 marks] (e) Discuss the problems of estimating the weighted average cost of capital when the bank overdraft is used as a source of long-term finance [4 marks] (f) Briefly discuss the factors that would prohibit the issue of new ordinary shares to fund the business. [2 marks] . ● .

Answer rating: 100% (QA)

a Calculate the current cost of capital at market values 6 marks Cost of Ordinary Equity Re Dividend per Share DPS Dividend paid last year per share R150 Market Price per Share R200 Growth Rate g 8 Re ... View the full answer