The Foschini Group has just issued a batch of preference shares that will pay a constant dividend of R8, beginning 6 years from now. If the required rate of return is 8%, what does the share cost today?
Bassa Braziers Ltd, operate in the fabrication industry. They feel that some of their older gas welding machines need to be replaced. They seek your help in order to calculate their cost of capital.
Their present capital structure is as follows:
600 000 R_{2} ordinary shares now trading at R2,40 per share.
200 000 preference shares trading at R2,50 per share (issued at R3 per share). 10 % p.a. fixed rate of interest.
A bank loan of R1 000 000 at 12 % p.a. (payable in 5 years time)
Additional data
a. The company?s beta is 1,4. A return on market of 15% and a risk free rate of 6 %.
b. Its current tax rate is 28 %.
c. Its current dividend is 50c per share and they expect their dividends to grow by 7 % p.a.
Required
1. Assuming that the company uses the CAPM to calculate their cost of equity, calculate their weighted average cost of capital.
2. A further R500 000 is needed to finance the expansion. Which option should they use (from ordinary shares, preference shares or loan financing) and why?