Question 1

1.1 At a board meeting a director remarks "selling preference shares with a return of 9% or debentures with a return of 9% is really one and the same thing". The company has the option of raising the R400 000 through either:

a) The sale of 40 000 preference shares at R10 per share or

b) 4 000 debentures of R100 each

NB: The tax rate is 30%

Do you agree with the directors assertion? Discuss with the aid of calculations

1.2 MB Mining and Manufactures shares have a beta of 1.40. At present government bonds/ treasury bills present a return of 6% and the market return is 12%. MB dividend was R2.20 per share last year and they expect dividends to grow at 5%. Their shares sell for R30 per share at present (par value R20). Calculate MB cost of equity using:

1.2.1 The Dividend Growth Model

1.2.2 The Capital Asset pricing Model

1.2.3 Explain the reasons for each method presenting different answers.