QUESTION $1(54$ marks$)$

Assume the Giraffe Ltd and Rhino Ltd cases below are separate case studies.

Giraffe Ltd

Giraffe Ltd $($Giraffe$)$ is a leading hospitality entity with hotels ranging from luxury to

budget hotels which are located across South Africa. Giraffe has a capital structure of

$56\%$:$44\%$ debt$-$to$-$equity.

Giraffe will be undertaking a construction project in the future during which a theatre

and related entertainment rooms will be built at some identified Giraffe luxury hotels.

To finance this construction project, Giraffe will be utilising the entity$$s internal

available funds from the retained earnings.

As Giraffe is not listed on the Johannesburg Stock Exchange $($JSE$)$ and therefore

the equity beta of the entity is not readily available. Horison Ltd $($Horison$)$ is a similar

hotel and entertainment entity, operating in the same industry as Giraffe. Horison is

listed on the JSE in the consumer services sector, where it can be observed that an

equity beta of $1\mathrm{.}35$ is applicable to Horison. From research conducted on Horison, it

was determined that Horison has a capital structure of $123\%.$

The average return offered in the accommodation sector is $13\mathrm{.}7\%$ while the long$-$term

RSA government bonds offer a return of $8\mathrm{.}4\%.$

A South African Income Tax rate of $27\%$ is applicable to companies.

Rhino Ltd

Rhino Ltd $($Rhino$)$ is one of South Africa$$s largest tourism and leisure entities which

assets include $16$ wildlife and other resorts.

Rhino is listed on the JSE in the consumer services sector through which the entity

has issued a total of $42000000$ ordinary shares to date.

$3$ HFMN$230-1\_$Jan$-$Jun$2024\_$SA$1\_$V$3\_$ES$\_05022024$

Rhino$$s earnings per share $($EPS$)$ on $31$ May $2024$ is R$39$ and the Price $-$ Earnings

ratio $($P$/$E ratio$)$ of the entity is $2\mathrm{.}6.$

The entity has a dividend policy of $18\%$ of earnings for the ordinary shares and wishes

to continue to meet this policy. Further, Rhino expects a growth rate of $5\mathrm{.}2\%$ annually

for the entity and, consequently, the earnings of the entity as well.

Rhino also has $13\%$ corporate bonds with a par value of R$110$ in issue. There are

$28500000$ such bonds in issue with a maturity date in $4$ years times and a current

trading price of R$107$ per bond. The interest of these corporate bonds is paid semiannually in advance.

Additionally, Rhino wishes to issue $41000000$ non$-$redeemable preference shares

through the JSE platform. The JSE will however charge a floatation cost of R$0\mathrm{.}90$ per

preference share, to facilitate the issuing of these preference shares. These nonredeemable preference shares will have an issue price of R$50$ each and a coupon rate

of $12\mathrm{.}6\%.$ Assume the issue price to be reflective of an accurate current value per

preference share.

Assume today is $31$ May $2024.$

A South African Income Tax rate of $27\%$ is applicable to companies.

REQUIRED:

$1\mathrm{.}1.$ Assist Giraffe Ltd in determining the cost of Giraffe Ltd$$s retained earnings.

Round to two decimals where applicable.

$(12$ marks$)$

$1\mathrm{.}2.$ Briefly explain why retained earnings are considered to have a cost $($of capital$)$

for an entity.

$(2$ marks$)$

$4$ HFMN$230-1\_$Jan$-$Jun$2024\_$SA$1\_$V$3\_$ES$\_05022024$

$1\mathrm{.}3.$ Assist Rhino Ltd in determining the required rate of return of the ordinary

shares as on $31$ May $2024.$

Round to two decimals where applicable.

$(8$ marks$)$

$1\mathrm{.}4.$ Assist Rhino Ltd in determining what the current required rate of return of the

non$-$redeemable preference shares will be if these prefence shares were to

be issued today.

Round to two decimals where applicable.

$(7$ marks$)$

$1\mathrm{.}5.$ Assist Rhino Ltd in determining the annual required rate of return of the

corporate bonds after taxation as on $31$ May $2024.$

Round to two decimals where applicable.

$(12$ marks