Sheffield Manufacturers Ltd$,$ operate in the printing and packaging industry. They feel that some of their older printing and labelling machines need to be replaced. They seek your help in order to calculate their cost of capital.

Their present capital structure is as follows:

$800000$ R$2$ ordinary shares now trading at R$2,50$ per share.

$250000$ preference shares trading at R$2$ per share $($issued at R$3$ per share$).$

$10\%$ fixed rate of interest.

$$ A bank loan of R $1500000$ at $13\%$ p$.$a$.($payable in $5$ years time$).$

Additional data

$$ The company$$s beta is $1\mathrm{.}3.$ The return on the market is $14\%$ and the risk free rate is $7\%.$

$$ Its current tax rate is $28\%.$

$$ Its current dividend is $40$c per share and it expects its dividends to grow by $8\%$ p$.$a$.$

Required:

$4\mathrm{.}2.$ Assuming that the company uses the Dividend Growth Model to calculate its cost of

equity. Calculate its weighted average cost of capital. $(22)$

$4\mathrm{.}2.$ If a further R$500000$ is needed to finance the expansion, which option should they

use from either ordinary shares, preference shares or loan financing and why?