Your company has the following capital structure that you consider optimal: Ordinary shares Non-redeemable preference shares...

 

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Your company has the following capital structure that you consider optimal: Ordinary shares Non-redeemable preference shares Debt 50% 15% 35% It is expected that your company's earnings and dividends will grow at a constant rate of 9% in the future. A dividend of R3.60 was paid last year. The current share price is R60. The company has a calculated Beta of 1.51. The non-redeemable preference shares were issued at their par value of R100 each and a dividend of 11% is paid annually. Non-redeemable preference shares are currently trading at R125. You have established the following: Government bonds yield 11% An average share on the JSE has a 14% expected rate of return. Current interest rates is 12% per annum. Current tax rate is 28%. REQUIRED: 1) Calculate the component cost of a. Debt b. Preference shares c. Ordinary shares, using two different methods: (i) Gordon dividend growth method as well as the (1) Capital Asset Pricing Model. 2) Calculate the weighted average cost of capital (WACC) for your company. 3) Explain how you will use the WACC as calculated in 2 above. 4) The WACC is affected by a variety of factors. Some are beyond the company's control, but others are influenced by company policies. List the factors that the company (i) can control, and (ii) cannot control. Your company has the following capital structure that you consider optimal: Ordinary shares Non-redeemable preference shares Debt 50% 15% 35% It is expected that your company's earnings and dividends will grow at a constant rate of 9% in the future. A dividend of R3.60 was paid last year. The current share price is R60. The company has a calculated Beta of 1.51. The non-redeemable preference shares were issued at their par value of R100 each and a dividend of 11% is paid annually. Non-redeemable preference shares are currently trading at R125. You have established the following: Government bonds yield 11% An average share on the JSE has a 14% expected rate of return. Current interest rates is 12% per annum. Current tax rate is 28%. REQUIRED: 1) Calculate the component cost of a. Debt b. Preference shares c. Ordinary shares, using two different methods: (i) Gordon dividend growth method as well as the (1) Capital Asset Pricing Model. 2) Calculate the weighted average cost of capital (WACC) for your company. 3) Explain how you will use the WACC as calculated in 2 above. 4) The WACC is affected by a variety of factors. Some are beyond the company's control, but others are influenced by company policies. List the factors that the company (i) can control, and (ii) cannot control.

Answer rating: 100% (QA)

To calculate the component cost of each capital structure component we will use two different methods the Gordon dividend growth method and the Capital Asset Pricing Model CAPM We will then calculate ... View the full answer