Sheffield Manufactures Ltd, operate in the printing and packaging industry. They feel that some of their...

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Sheffield Manufactures Ltd, operate in the printing andpackaging industry. They feel that some of their older printing andlabelling machines need to be replaced. They seek help in order tocalculate their cost of capital. Their present capital structure isas follows: â€¢ 800 000 R2 ordinary shares now trading at R2.50 pershare. â€¢ 250 000 preference shares trading at R2 per share (issuedat R3 per share), at 10% fixed rate of interest. â€¢ A bank loan ofR1 500 000 at 13% p.a. (payable in 5 yearsâ€™ time) Additional dataa. The companyâ€™s beta is 1.3. the return on the market is 14% andthe risk free rate is 7% b. Its current tax rate is 28% c. Itscurrent dividend is 40c per share and it expects its dividends togrow by 8% p.a. Required 1.1 Assuming that the company uses theDividend Growth Model to calculate its cost of equity. Calculateits weighed average cost of capital. (17) 1.1.1 If a further R500000 is needed to finance the expansion, which option should theyuse from ordinary shares, preference shares or loan financing andwhy? (3)

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Costs of Capital First Alternative Price of share being R250 Dividend of next year Cost of ordinary shares Growth rate That is R250 40c8 of 40c Cost of ordinary shares 8 Solving it 4320c R250 Cost of ordinary shares 8 Cost of ordinary shares 2528 Second Alternative Cost of ordinary shares Risk free rate Beta x Market Return Risk free rate That is 7 13 x 14 7 That is 161 Cost of preference shares 10 x 32 15 Cost of debt 13 x 128 13 x 72 See Answer

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