COST OF CAPITAL: QUESTION 1 20 MARKS JJ Construction Ltd needs to purchase a new piece of equipment in the year 2021. The new equipment cost R2 000 000. JJ Construction Ltd will use R900 000 of retained earnings to fund the purchase of the equipment. Ordinary shares are currently trading at R120 per share. Dividends are currently R6.50 per share and are expected to grow at 8% per annum for the foreseeable future. Additional financing will be obtained as follows: 10 000 - R70 preference shares will be issued at R50 per share. The preference shares have a coupon rate of 10%. Floatation cost are negligible. 600 - R1200 (par value) debentures with a coupon rate of 10% will be sold at R1 000. Floatation costs will amount to 3% of the amount raised. Interest on the debentures is paid annually. The company tax rate is 28% every year. JJ Construction Ltd does not plan on issuing new ordinary shares to fund the purchase of the new equipment. 1.1 Calculate the component costs of all the methods of finance available to JJ Construction Ltd. Show all workings 1.2 Calculate the weighted average cost capital for JJ Construction based on the component costs in 1.1 above. 1.3 Now, assume that JJ Construction Ltd, decided to issue new shares and that this issue of new ordinary shares will result in floatation costs of R12 per share. 1.3.1 Calculate the component cost of issuing new shares based on the new assumption in 1.3. 1.3.2 Calculate the new weighted average cost of capital using new shares instead of retained earnings. COST OF CAPITAL: QUESTION 1 20 MARKS JJ Construction Ltd needs to purchase a new piece of equipment in the year 2021. The new equipment cost R2 000 000. JJ Construction Ltd will use R900 000 of retained earnings to fund the purchase of the equipment. Ordinary shares are currently trading at R120 per share. Dividends are currently R6.50 per share and are expected to grow at 8% per annum for the foreseeable future. Additional financing will be obtained as follows: 10 000 - R70 preference shares will be issued at R50 per share. The preference shares have a coupon rate of 10%. Floatation cost are negligible. 600 - R1200 (par value) debentures with a coupon rate of 10% will be sold at R1 000. Floatation costs will amount to 3% of the amount raised. Interest on the debentures is paid annually. The company tax rate is 28% every year. JJ Construction Ltd does not plan on issuing new ordinary shares to fund the purchase of the new equipment. 1.1 Calculate the component costs of all the methods of finance available to JJ Construction Ltd. Show all workings 1.2 Calculate the weighted average cost capital for JJ Construction based on the component costs in 1.1 above. 1.3 Now, assume that JJ Construction Ltd, decided to issue new shares and that this issue of new ordinary shares will result in floatation costs of R12 per share. 1.3.1 Calculate the component cost of issuing new shares based on the new assumption in 1.3. 1.3.2 Calculate the new weighted average cost of capital using new shares instead of retained earnings