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Tilda Ltd, operate in the printing and packaging industry. They feel that some of their older printing and labelling machines need to be replaced. They
Tilda 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 R2 ordinary shares now trading at R2,50 per share. - 250000 preference shares trading at R2 per share (issued at R3 per share). 10% fixed rate of interest. - A bank loan of R 1500000 at 13% p.a. Additional information: a. The company's beta is 1.3 . The return on the market is 14% and the risk free rate is 7%. b. Its current tax rate is 28%. c. Its current dividend is 40c per share and it expects its dividends to grow by 8% p.a. Required: 2.1 Assuming that the company uses the Dividend Growth Model to calculate its cost of equity, calculate its weighted average cost of capital. (20) 2.2 If a further R500000 is needed to finance the expansion, which option should they use from either ordinary share, preference shares or loan financing and why
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