Question 6

Amx Lit (Pty) Ltd operates in the detergents manufacturing industry. After 10 years of trading in the business, the machinery they use to manufacture started to show signs of wear and tear. The operations manager suggested to management that they should consider replacing the machinery with new ones. The CFO needed to strategies on how the business should finance the purchasing of the new machinery. The CFO needs to calculate the company's cost of capital:

Amx Lit (Pty) Ltd capital structure is as follows:

a) 1 mil ordinary shares trading at 180 originally issued at 120 per share

b) 360 000 preference shares issued at 200 per share currently trading at 250 per share

c) 250 000 debentures issued at 200 at 4.7% p.a (payable in 10 years time)

Additional information:

1 . Amix Lit company beta is 1.3. Return on market of 11% and risk free rate of 7%

2 .The company tax rate is 28%

3 . Amix Lit dividend is 35 cents per share and they expect dividend growth of 10% per annum

Required

Amix Lit uses CAPM to calculate cost of equity. Calculate their Weighted Average Cost of Capital