QUESTION 1:
A) 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?
B) 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 R2 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 :
A) Assuming that the company uses the CAPM to calculate their cost of equity, calculate their weighted average cost of capital.
B) 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?
QUESTION 2:
Consider the following pre-merger information concerning two firms, Mokhaba Manufacturers and Mabhida Merchants:
Data Mokhaba Mabhida
Shares issued 1600 1000
Price per share R35 R25
Mokhaba wishes to acquire Mabhida and believes that there will be synergistic benefits of R6000.
Note: Both firms have no debt.
A) If Mabhida is willing to be acquired at R30 per share, what is the NPV of the merger?
B) Calculate the PPS of the merged company.
C) Calculate the merger premium.
QUESTION 3:
The Equity accounts of Blydskap Ltd are shown below:
Ordinary Share Capital (R2 par value) R200 000
Share Premium 80 000
Retained Profits 100 000
Total Shareholders’ Equity 380 000
If Blydskap?s shares sell for R10 per share, and a 10% scrip dividend is declared, how many new shares will be distributed?
1) Redraft the Equity accounts section of the balance sheet.
2) Has this been a wise decision? Explain.
3) Tygerberg Ltd has declared an annual dividend of 90c per share.
Their after tax profits for the year was R60 000 and they have 12 000 share in issue.
4) Calculate profit per share.
5) What is their payout ratio?
Question 4:
Bugsy?s Haulers, is considering the purchase or lease of a fuel tanker.
The Purchase Option:
The purchase price is R4 000 000. This will be paid off as follows:
• R2 500 000 immediately
• R1 650 000 at the end of the first year (inclusive of interest).
If the tanker is owned, the service and maintenance charges will amount to R20 000 per annum. The salvage value of the tanker at the end of the period amounts to R500 000. The company uses the straight line method of depreciation.
The Leasing Option:
Alternatively, the tanker can be leased on a four year contract for R850 000 pa, with a deposit of R700 000 payable immediately and 50% refunded at end of lease period.
The after tax cost of debt is 12%. And the company tax rate is 30%
Required:
A) Calculate the cost of owning and leasing using the discounted cash flow method.
B) Advise on the option to adopt, with justification.