Question 2 (22 marks) SCH has also got hold of information that there is a likelihood...

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Question 2 (22 marks) SCH has also got hold of information that there is a likelihood of a big pay off if they open a depot in Gobabis. However, the management of SCH can only present this project to shareholders for funding if it produces a positive net present value. You have then been tasked to help them determine the cost of capital they should use for the NPV calculation. The cost of capital should be calculated using the company's current capital structure. SCH's present capital structure is as follows: 800 000 N$2 ordinary shares. These shares are currently selling on the Namibia Stock Exchange (NSX) at N$2.50 per share. 10% N$3 250 000 preference shares trading at N$2 per share. A bank loan of N$1 500 000 at 13% p.a. (payable in 5 years' time). Additional information The company's beta is 1.3. The return on the market is 14% and the risk free rate is 7%. The company is taxed at a rate of 28%. SCH has recently paid a dividend of 40c per share and expects the dividends to grow by 8% p.a. into the foreseeable future. Question 2 (22 marks) SCH has also got hold of information that there is a likelihood of a big pay off if they open a depot in Gobabis. However, the management of SCH can only present this project to shareholders for funding if it produces a positive net present value. You have then been tasked to help them determine the cost of capital they should use for the NPV calculation. The cost of capital should be calculated using the company's current capital structure. SCH's present capital structure is as follows: 800 000 N$2 ordinary shares. These shares are currently selling on the Namibia Stock Exchange (NSX) at N$2.50 per share. 10% N$3 250 000 preference shares trading at N$2 per share. A bank loan of N$1 500 000 at 13% p.a. (payable in 5 years' time). Additional information The company's beta is 1.3. The return on the market is 14% and the risk free rate is 7%. The company is taxed at a rate of 28%. SCH has recently paid a dividend of 40c per share and expects the dividends to grow by 8% p.a. into the foreseeable future.

Answer rating: 100% (QA)

To calculate the cost of capital for SCH we can use the weighted average cost of capital WACC formul... View the full answer