You are a Finance Officer working within the Finance Department of Fireworks - a company that...
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You are a Finance Officer working within the Finance Department of Fireworks - a company that designs, manufactures and sells a range of outdoor grills, including moveable stand-alone grills (braai-stands) that can be located wherever the user wishes in an outdoor setting. Fireworks is listed on the JSE, and they want to develop a grill named - the Explorer. The development team has completed manufacturing the first prototype, and Fireworks require funding for a full-scale production. Your manager has requested that you calculate the cost of capital to form part of the proposal to the Board. Below are the latest annual financial statements as at 31 March 2023: Share 450 000 shares at par value 10% preference shares at R100 par value 50 000 bonds at R1 000 par value Ordinary Capital Preference shares R765 000 R15 000 000 Bonds Additional information: • The ordinary shares have a par value of R1.70 per share. The company recently paid a dividend or R3.48 per share. The dividend is expected to grow by 6% into the foreseeable future. Ordinary shareholders of Otto require a return of 17%. R50 000 000 • • The 10% bonds are redeemable in 6 years at par. Coupon payments are made annually. The current yield to maturity on the bonds is 7.87%. . Company tax rate is 27%. Preference shares have a par value of R100 per share. The shares are currently trading at R130 per share. REQUIRED: 2.1 Describe three shortcomings of the dividend growth 3 marks model. 2.2 Explain the difference between the yield to maturity and 2 marks the coupon rate of a bond. 2.3 Calculate the market value of ordinary shares. 2.4 Calculate the cost of preference shares. 2.5 Calculate the market value of one bond. 2.6 Calculate the weighted average cost of capital. 3 marks 2 marks 5 marks 10 marks You are a Finance Officer working within the Finance Department of Fireworks - a company that designs, manufactures and sells a range of outdoor grills, including moveable stand-alone grills (braai-stands) that can be located wherever the user wishes in an outdoor setting. Fireworks is listed on the JSE, and they want to develop a grill named - the Explorer. The development team has completed manufacturing the first prototype, and Fireworks require funding for a full-scale production. Your manager has requested that you calculate the cost of capital to form part of the proposal to the Board. Below are the latest annual financial statements as at 31 March 2023: Share 450 000 shares at par value 10% preference shares at R100 par value 50 000 bonds at R1 000 par value Ordinary Capital Preference shares R765 000 R15 000 000 Bonds Additional information: • The ordinary shares have a par value of R1.70 per share. The company recently paid a dividend or R3.48 per share. The dividend is expected to grow by 6% into the foreseeable future. Ordinary shareholders of Otto require a return of 17%. R50 000 000 • • The 10% bonds are redeemable in 6 years at par. Coupon payments are made annually. The current yield to maturity on the bonds is 7.87%. . Company tax rate is 27%. Preference shares have a par value of R100 per share. The shares are currently trading at R130 per share. REQUIRED: 2.1 Describe three shortcomings of the dividend growth 3 marks model. 2.2 Explain the difference between the yield to maturity and 2 marks the coupon rate of a bond. 2.3 Calculate the market value of ordinary shares. 2.4 Calculate the cost of preference shares. 2.5 Calculate the market value of one bond. 2.6 Calculate the weighted average cost of capital. 3 marks 2 marks 5 marks 10 marks
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Answer rating: 100% (QA)
21 Three shortcomings of the dividend growth model 1 Assumes constant dividend growth The dividend growth model assumes that dividends will grow at a constant rate indefinitely In reality dividend gro... View the full answer
Related Book For
Intermediate Accounting
ISBN: 978-1118742976
16th edition
Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield
Posted Date:
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