QUESTION ONE

$25$

Background Information

Pfeka Garments South Africa Limited $($PGSA$),$ a listed company known for crafting custom dresses for churches across South Africa, is experiencing robust growth due to the recent surge in church establishments throughout Africa. To support its expansion plans, PGSA has recently appointed Zandile Mkhize CA$($SA$)$ as its first Financial Director. The company is now assessing its capital structure to optimize financing costs and enhance its strategic initiatives.

You are provided with the following detailed capital structure and financial information from the most recent financial statements for the year ended $31$ December $2023$:

A: Capital structure and financial information for the year ended $31$ December $2023$:

Ordinary Share Capital

PGSA has issued $800,000$ ordinary shares with a market capitalization of R$16,000,000.$ This valuation represents the total equity value provided to shareholders, supporting both operational needs and strategic financial initiatives.

Preference Shares:

The company has issued $600,000$ preference shares issued at $R1$ per share, with a fixed dividend rate of $13\%.$ Similar preference shares are currently trading at $180$ cents per share.

Bank Loan:

Two years ago, PGSA secured a $10-$year bank loan amounting to R$9,500,000,$ which carries an interest rate of $10\%$ compounded annually, for financing larger projects. The interest is paid annually while the capital on the loan will be paid off in one balloon payment. The interest is tax$-$deductible.

A similar debt instrument is currently trading at $8\%$ p$.$a$.$

Additional information

PGSA recently announced a dividend of R$2,30$ per share with a projected annual constant growth rate of $4\%,$ indicating optimistic future earnings and cash flow expectations from management

The $7\mathrm{.}75\%$ yield on government bonds serves as the risk$-$free rate in financial models, crucial for assessing the cost of capital and setting benchmarks for expected returns on riskier investments.

The market risk premium is currently at $9\%.$

PGSA's Beta is currently $1\mathrm{.}2.$

A corporate tax rate of $27\%$

Required:

A$.$ With reference to part A$.$ Capital structure and financial Information.

$1\mathrm{.}1$ Calculate the cost of equity for PGSA based on the

i$.$ Dividend growth model

$(5)$

ii$.$ Capital Asset Pricing Model

$(3)$

$1\mathrm{.}2$ Assuming a cost of equity of $15\mathrm{.}96\%$ for ordinary shares, calculate the current WACC as of $31$ December $2023.$

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