QUESTION 2 (16 marks)

Welcome Ltd. (Welcome) is a supplier of cutlery and other kitchen items such as plates and mugs. Welcome is located in the northern suburbs of the Western Cape.

The entity has a 30 April financial yearend and retained earnings of R3 880 000.

Welcome has 2 500, 13.69% non-cumulative, non-redeemable preference shares in issue with a par value of R100 each. The dividends attached to these shares were not paid last year and is also not expected to be paid for the next 4 years. Only thereafter will the annual dividends be paid again in arrears.

Similar risk preference shares have been quoting yields of 13.57% per annum.

Additionally, Welcome also has 1 300 non-redeemable preference shares with a par value of R110 each. The 12.2% coupon rate is payable annually.

Similar risk preference shares have quoted yields of 12.6% annually.

The entitys beta is 1.33 while the return which the market has been offering investors in general, has been 12.51%.

Assume a South African Income Tax rate of 28% and that South African long-term government bonds has a return of 4.4%.

Required:

2.1 Calculate the current value of Welcome Ltd.s non-cumulative, nonredeemable preference shares. (8 marks)

2.2 Calculate the current value of Welcome Ltd.s 1 300 non-redeemable preference shares. (4 marks)

2.3. Calculate the retained earnings cost of funding. (4 marks)

Round to two decimals where required.