The following information regarding SAA Engineering Limiteds current financial situation is available: Cost of equity 14% Ordinary shares issued 700 000 Share price per share R35 EBIT R3 600 000 Market value of debt R2 500 000 Cost of debt 9% (pre-tax) The companys market is stable and they expect no growth. All earnings are paid out as dividends. If they increase their debt so that their capital structure has 50% debt, the cost of equity will rise to 17,3% and the interest rate on all debt will rise to 11,5% (pre-tax). The current tax rate is 28%.

REQUIRED: a) Calculate the total market value (market capitalisation) of SAA Engineering Limiteds issued ordinary shares. (2)

b) Calculate the total market value of SAA Engineering Limited. (2)

c) Calculate the current weighted average cost of capital (WACC) of the company. (6)

d) Calculate the weighted average cost of capital of the company if they increase their debt to 50% of their capital structure. (6)

e) Calculate the value of the 50% equity (Guidance: use the dividend growth model to determine the market value of the shares, P0) (4) [20]