FINANCIAL MANAGEMENT

Question 6 The board of directors of a manufacturing company in South Africa decided to expand its business operations. Additional capital is to be raised for this purpose. The following information was supplied to the financial manager to assist with the financing decision: A few years ago, the company issued 100,000 ordinary shares at R2 per share. The current price for one share is R2.50. The last dividend paid was 50c. The next expected dividend will be 75c. The company also issued 100,000 10% preference shares at R1 per share. The current price for one share is R1.50. A 12-year bond was taken out seven years ago and raised R1,000,000. The capital value of the bond is R50. The coupon rate is 5%. The current price is R63.36. A R750,000 15% loan was taken out 5 years ago. The current outstanding balance is R500,000. The company has a tax rate of 28%. Required 6.1 Calculate the cost of ordinary shares. 6.2 Calculate the cost of preference shares. 6.3 Calculate the cost of the bonds (tip: guess 4%). 6.4 Calculate the weighted average cost of capital by using book value weights. (3 Marks) (3 Marks) (6 Marks) (18 Marks)