Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Royta Ltd, operates in the commercial painting industry. They have reluctantly come to the conclusion that some of their older equipment is reaching the end

Royta Ltd, operates in the commercial painting industry. They have reluctantly come to the conclusion that some of their older equipment is reaching the end of its productive life and will need to be replaced sooner or later. They have asked for your assistance in determining their cost of capital in order to make this decision.

Their present capital structure is as follows:

  • 1 200 000 R2 ordinary shares now trading at R2,20 per share.
  • 80 000 preference shares trading at R1.80 per share (issued at R2 per share). Interest at 10% p.a.
  • A bank loan of R 1 000 000 at 10.5% p.a. (payable in 3 years' time)

Additional data

a. The company's beta is 1.4. A return on market of 12% is accepted and a risk-free rate of 7% is applicable.

b. The current tax rate is 30%

c. The company's current dividend is 43c per share and they expect their dividends to grow by 7% p.a.

Question

Assuming that the company uses the CAPM to calculate its cost of equity. Calculate its weighted average cost of capital. 15 marks

A further R800 000 is needed to finance the expansion. Which option should they use (from ordinary shares, preference shares or loan financing)? Provide a reason for

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Fundamentals Of Accounting

Authors: Claudia Gilbertson

10th Edition

1111581169, 978-1111581169

More Books

Students also viewed these Accounting questions

Question

A greater tendency to create winwin situations.

Answered: 1 week ago

Question

Improving creative problem-solving ability.

Answered: 1 week ago