Question 3 [30] You are the newly appointed financial manager of Your Concerns (Pty) Ltd. The...
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Question 3 [30] You are the newly appointed financial manager of Your Concerns (Pty) Ltd. The board of directors invited you to a meeting where you will discuss the WACC and future financing methods for the company. You received the following information to prepare for the meeting: Your Concerns (Pty) Ltd Extracts from the statement of financial position for the year ending December 2021 2021 Equity Share capital (100 ordinary shares) 100 000 Non-current liabilities Long-term liabilities 50 000 • A dividend of R50 per share will be declared in 2022. An 8% increase in dividends per share is expected for the 2023 financial year and a dividend of R60 per share will be paid in the 2024 financial year of assessment. The company expects a constant growth of 5% after the 2024 financial year of assessment. The shareholders of the ordinary shares expect a return of 15% per year. Bonds similar to the long-term liabilities have a yield to maturity of 10.5% per annum. The income tax rate is 30%. Required: Round off your answers to two decimals. 3.1. Using the constant growth valuation method, calculate the total cost of the ordinary shares. (15) 3.2. Based on the calculation in 3.1, calculate the weighted average cost of capital (WACC) for Your Concerns (Pty) Ltd. (12) 3.3. Considering the cost of equity versus the cost of debt, advise the directors whether they should fund future projects using money obtained from the shareholders or borrowed from financial institutions, for example banks. (3) Question 3 [30] You are the newly appointed financial manager of Your Concerns (Pty) Ltd. The board of directors invited you to a meeting where you will discuss the WACC and future financing methods for the company. You received the following information to prepare for the meeting: Your Concerns (Pty) Ltd Extracts from the statement of financial position for the year ending December 2021 2021 Equity Share capital (100 ordinary shares) 100 000 Non-current liabilities Long-term liabilities 50 000 • A dividend of R50 per share will be declared in 2022. An 8% increase in dividends per share is expected for the 2023 financial year and a dividend of R60 per share will be paid in the 2024 financial year of assessment. The company expects a constant growth of 5% after the 2024 financial year of assessment. The shareholders of the ordinary shares expect a return of 15% per year. Bonds similar to the long-term liabilities have a yield to maturity of 10.5% per annum. The income tax rate is 30%. Required: Round off your answers to two decimals. 3.1. Using the constant growth valuation method, calculate the total cost of the ordinary shares. (15) 3.2. Based on the calculation in 3.1, calculate the weighted average cost of capital (WACC) for Your Concerns (Pty) Ltd. (12) 3.3. Considering the cost of equity versus the cost of debt, advise the directors whether they should fund future projects using money obtained from the shareholders or borrowed from financial institutions, for example banks. (3)
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