QUESTION 1

Skosana Ltd manufactures cables that are used in the construction sector. The company uses debt and equity to finance operations. Share capital amounts to R 50m and R 100m ordinary shares have been issued. The current share price on the JSE (Johannesburg Stock Exchange) is R 1.30. The company's long-term debentures are currently yielding 9% and the book value of the debentures is R 150m. The coupon rate is 11%. The company's beta is estimated to be 1.20 and the market risk premium is 6%. Government bonds are currently yielding 7.5% per year. The company tax rate is 28% and retained earnings amount to R 40m.

REQUIRED:

Use the market and book value to calculate the weighted average cost of capital for Skosana Ltd.

QUESTION 2

Ellerines Furniture produces office furniture. It has EBIT of R 2.5 million; a tax rate of 28%; debentures outstanding of R 1.6 million, a before-tax cost of debt ( kd) of 10%; cost of equity (ks ) of 12%; and 450 000 ordinary shares issued with a book value of R 11 per share. Ellerines Furniture's dividend pay-out ratio is 30% and it expects a growth rate of 7%.

REQUIRED:

Calculate Ellerines Furniture's retained earnings, dividend per share, share price and weighted average cost of capital.