QUESTION 1 (56 marks)

Shop-Stop Ltd. (SS) is a public company listed on the Johannesburg Stock Exchange (JSE). SS is a retailer of various food and other small basic lifestyle utilities. Consequently, SS is listed in the consumer goods section of the JSE. The entity has outlets nationwide and a 31 March-financial yearend. The following is a summary of SSs 2023 financial year audited financial statements: Shop-Stop Ltd.

Statement of Financial Position as at 31 March 2023 2023 2022

R'000 R'000

Total Current Assets 4 760 000 4 350 000 Total Non-Current Liabilities 15 990 000 16 100 000

Equity ? ? Total Current Liabilities 3 980 000 3 570 000 Total Non-Current Liabilities ? ? Number of shares in issue(singular) 1 450 000 1 450 000 Shop-Stop Ltd. Statement of Comprehensive Income for the year ending 31 March 2023

2023 2022

R'000 R'000

EBIT ? ? Future Plans The entity wishes to open an outlet in Kimberley, Northern Cape. The Chief Financial Officer (CFO) of SS has worked closely with the financial department personnel to draft the most accurate possible budget and cash flow projects for the planned Kimberley-outlet to base important decisions on. Based on these projections, an amount of R8.7 million will be required at the inception of this project (i.e., the Kimberley outlet) to fund expenses and asset acquisitions such as the building, shop utilities, inventory purchases, employee recruitments, etc. The project is planned to intercept at the beginning of the 2025-financial year. As a consequence of the opening of the Kimberley outlet, SSs net profit after tax is projected to grow by 9.4% per annum. This trend will prevail for 3 years, whereafter, the growth will plateau at 7.8% per year. After evaluating the current cash flow budget of the entity, SS has established that all the current available funds are allocated to the financing of other existing assets and expected expenses. Either an equity issue or debt acquisition will therefore be required to fund the project.

Financing Alternative 1 SS could perform a rights issue with a subscription price of R24 per share. Currently, as at 1 April 2023, SSs ordinary shares are trading at R28 each on the JSE. SS has recently declared and paid out a dividend to these shares in line with the entitys dividend payout ratio of 21% of net profit after tax. This dividend payout ratio is expected to continue in the future as SS aims to maintain a stable dividend payout ratio to limit negative market reactions as far as possible.

Financing Alternative 2 SS could issue 10.7% cumulative, non-redeemable preference shares. Similar preference shares have a required rate of return of 11.2%. Each preference share will have a face value of R5 attached to it. As the Kimberley outlet, which these instruments will finance, are expected to grow by 9.4% per annum for the first three years, SS will not be paying out the preference dividend during the first two years in order to ensure that sufficient funds are available and retained within the entity to finance the growth in the business. Only thereafter, will SS proceed with paying the dividends annually. Other information SSs current P/E ratio is 16. The average return in the consumer goods market is 11.9% per annum. South African long-term government bonds offer a return of 8.7% per annum. Assume a South African Income Tax rate of 27% applicable to companies. Assume all income and expenses included in the net profit before tax are taxable or deductible. SSs beta is 0.95. Currently, the only share type SS have in issue is ordinary shares. Assume today is 1 April 2023.

REQUIRED: 1.1. Refer to Financing Alternative 1. Determine what the value of Shop-Stop Ltd. ordinary shares expected ex-right price, per right will be. (7 marks)

1.2. Refer to Financing Alternative 1. Calculate the value of each of Shop-Stop Ltd. ordinary shares after the right issue has been made. Utilise the dividend discount model for the valuation. (27 marks)

1.3. Refer to Financing Alternative 2. Calculate the current value of each preference share. (12 marks)

1.4. Refer to Financing Alternative 2. Shop-Stop Ltd. is considering adjusting the preference shares to non-cumulative, non-redeemable preference shares. To compensate the preference shareholders, the dividend will be increased by 0.8%. Similar preference dividends have an 11.73% required rate of return attached to them. Calculate the current value from each of these preference shares. (10 marks

QUESTION 1 (56 marks) Shop-Stop Ltd. ("SS") is a public company listed on the Johannesburg Stock Exchange ("JSE"). SS is a retailer of various food and other small basic lifestyle utilities. Consequently, SS is listed in the consumer goods section of the JSE. The entity has outlets nationwide and a 31 March-financial yearend. The following is a summary of SS's 2023 financial year audited financial statements: Future Plans The entity wishes to open an outlet in Kimberley, Northern Cape. The Chief Financial Officer ("CFO") of SS has worked closely with the financial department personnel to draft the most accurate possible budget and cash flow projects for the planned Kimberley-outlet to base important decisions on. Based on these projections, an amount of R8.7 million will be required at the inception of this project (i.e., the Kimberley outlet) to fund expenses and asset acquisitions such as the building, shop utilities, inventory purchases, employee recruitments, etc. The project is planned to intercept at the beginning of the 2025-financial year. As a consequence of the opening of the Kimberley outlet, SS's net profit after tax is projected to grow by 9.4% per annum. This trend will prevail for 3 years, whereafter, the growth will plateau at 7.8% per year. After evaluating the current cash flow budget of the entity, SS has established that all the current available funds are allocated to the financing of other existing assets and expected expenses. Either an equity issue or debt acquisition will therefore be required to fund the project. Financing Alternative 1 SS could perform a rights issue with a subscription price of R24 per share. Currently, as at 1 April 2023, SS's ordinary shares are trading at R28 each on the JSE. SS has recently declared and paid out a dividend to these shares in line with the entity's dividend payout ratio of 21% of net profit after tax. This dividend payout ratio is expected to continue in the future as SS aims to maintain a stable dividend payout ratio to limit negative market reactions as far as possible. Financing Alternative 2 SS could issue 10.7% cumulative, non-redeemable preference shares. Similar preference shares have a required rate of return of 11.2%. Each preference share will have a face value of R5 attached to it. As the Kimberley outlet, which these instruments will finance, are expected to grow by 9.4% per annum for the first three years, SS will not be paying out the preference dividend during the first two years in order to ensure that sufficient funds are available and retained within the entity to finance the growth in the business. Only thereafter, will SS proceed with paying the dividends annually. Other information - SS's current P/E ratio is 16 . - The average return in the consumer goods market is 11.9% per annum. - South African long-term government bonds offer a return of 8.7% per annum. - Assume a South African Income Tax rate of 27% applicable to companies. - Assume all income and expenses included in the net profit before tax are taxable or deductible. - SS's beta is 0.95 . - Currently, the only share type SS have in issue is ordinary shares. - Assume today is 1 April 2023. REQUIRED: 1.1. Refer to Financing Alternative 1. Determine what the value of Shop-Stop Ltd. ordinary shares' expected ex-right price, per right will be. (7 marks) 1.2. Refer to Financing Alternative 1. Calculate the value of each of Shop-Stop Ltd. ordinary shares after the right issue has been made. Utilise the dividend discount model for the valuation. (27 marks) 1.3. Refer to Financing Alternative 2. Calculate the current value of each preference share. (12 marks) 1.4. Refer to Financing Alternative 2. Shop-Stop Ltd. is considering adjusting the preference shares to non-cumulative, non-redeemable preference shares. To compensate the preference shareholders, the dividend will be increased by 0.8%. Similar preference dividends have an 11.73% required rate of return attached to them. Calculate the current value from each of these preference shares. QUESTION 1 (56 marks) Shop-Stop Ltd. ("SS") is a public company listed on the Johannesburg Stock Exchange ("JSE"). SS is a retailer of various food and other small basic lifestyle utilities. Consequently, SS is listed in the consumer goods section of the JSE. The entity has outlets nationwide and a 31 March-financial yearend. The following is a summary of SS's 2023 financial year audited financial statements: Future Plans The entity wishes to open an outlet in Kimberley, Northern Cape. The Chief Financial Officer ("CFO") of SS has worked closely with the financial department personnel to draft the most accurate possible budget and cash flow projects for the planned Kimberley-outlet to base important decisions on. Based on these projections, an amount of R8.7 million will be required at the inception of this project (i.e., the Kimberley outlet) to fund expenses and asset acquisitions such as the building, shop utilities, inventory purchases, employee recruitments, etc. The project is planned to intercept at the beginning of the 2025-financial year. As a consequence of the opening of the Kimberley outlet, SS's net profit after tax is projected to grow by 9.4% per annum. This trend will prevail for 3 years, whereafter, the growth will plateau at 7.8% per year. After evaluating the current cash flow budget of the entity, SS has established that all the current available funds are allocated to the financing of other existing assets and expected expenses. Either an equity issue or debt acquisition will therefore be required to fund the project. Financing Alternative 1 SS could perform a rights issue with a subscription price of R24 per share. Currently, as at 1 April 2023, SS's ordinary shares are trading at R28 each on the JSE. SS has recently declared and paid out a dividend to these shares in line with the entity's dividend payout ratio of 21% of net profit after tax. This dividend payout ratio is expected to continue in the future as SS aims to maintain a stable dividend payout ratio to limit negative market reactions as far as possible. Financing Alternative 2 SS could issue 10.7% cumulative, non-redeemable preference shares. Similar preference shares have a required rate of return of 11.2%. Each preference share will have a face value of R5 attached to it. As the Kimberley outlet, which these instruments will finance, are expected to grow by 9.4% per annum for the first three years, SS will not be paying out the preference dividend during the first two years in order to ensure that sufficient funds are available and retained within the entity to finance the growth in the business. Only thereafter, will SS proceed with paying the dividends annually. Other information - SS's current P/E ratio is 16 . - The average return in the consumer goods market is 11.9% per annum. - South African long-term government bonds offer a return of 8.7% per annum. - Assume a South African Income Tax rate of 27% applicable to companies. - Assume all income and expenses included in the net profit before tax are taxable or deductible. - SS's beta is 0.95 . - Currently, the only share type SS have in issue is ordinary shares. - Assume today is 1 April 2023. REQUIRED: 1.1. Refer to Financing Alternative 1. Determine what the value of Shop-Stop Ltd. ordinary shares' expected ex-right price, per right will be. (7 marks) 1.2. Refer to Financing Alternative 1. Calculate the value of each of Shop-Stop Ltd. ordinary shares after the right issue has been made. Utilise the dividend discount model for the valuation. (27 marks) 1.3. Refer to Financing Alternative 2. Calculate the current value of each preference share. (12 marks) 1.4. Refer to Financing Alternative 2. Shop-Stop Ltd. is considering adjusting the preference shares to non-cumulative, non-redeemable preference shares. To compensate the preference shareholders, the dividend will be increased by 0.8%. Similar preference dividends have an 11.73% required rate of return attached to them. Calculate the current value from each of these preference shares