Question Two

The following information relate to Katutula Plc

Year EPS(k) dividend (ngwee)

2014 15 11

2015 27 12

2016 33 13

2017 45 17

2018 57 21

Katutula Plc has 16million K1 ordinary shares in issue and current share price stand at K3 per

share as of the year ended 2018. Whereas the book value of equity per share was K3.6 in

2013. Katutula Plc has also the following debt with a par value of K100 in its capital structure

as at 31st December, 2018.

i. 8% irredeemable bond with market value of K75 per ngwee and book value of K15

million

ii. Redeemable bond with coupon payment of K6 and market value of K90 per ngwee as

well as a book value of K9 million. Redemption value is at par and redemption date

31st December, 2022. Interest payment is made annually and in arrears.

iii. 10% redeemable bond with market value of K98 per ngwee and book value of K11

million. Redemption value being K106 per ngwee and redemption date 30th June

2018. Interest payment is made semi-annually and in arrears.

iv. Dividend and all interest have just been paid and corporate tax is 30% per year.

Required:

a) Estimate the annual cost of equity using the dividend growth model and earning

retention model. (5 marks)

b) Estimate the annual cost of each type of debt. (12 marks)

The board of Vanda Plc, a subsidiary of Katutula Plc decides that it needs approximately

K1million more in shareholders funds to finance a project. The share price of Vanda Plc is

currently selling at 130 ngwee and it is considering an issue of a five-for one rights issue at

100ngwee. However, one of the independent board members is proposing that the K1million

should be raised by means of a convertible loan with a coupon of 10% annually against a

market rate of 13% annually with conversion possible after two years at Eighty three shares

for every K100 of stock held. The board is attracted to the idea of cheaper interest rate and

avoiding the need to sell shares at a discount because it reasonably expects the share price

to be over 135 ngwee within two years.

Required:

c) Based on the information provided above, advice the board on the best option to

undertake. (8 marks) (Total: 25 marks