Answer to Question #133084 in Macroeconomics for SME

Question

Royta Ltd, operates in the commercial painting industry. They have reluctantly come to the
conclusion that some of their older equipment is reaching the end of its productive life and will
need to be replaced sooner or later. They need your assistance in determining their
cost of capital in order to make this decision.
Their present capital structure is as follows:
 1 200 000 R2 ordinary shares now trading at R2,20 per share.
 80 000 preference shares trading at R1.80 per share (issued at R2 per share). Interest
at 10% p.a.
 A bank loan of R 1 000 000 at 10.5% p.a. (payable in 3 years’ time)
Additional data
a. The company’s beta is 1.4. A return on market of 12% is accepted and a risk free rate
of 7% is applicable.
b. The current tax rate is 30%
c. The company’s current dividend is 43c per share and they expect their dividends to
grow by 7% p.a.
Required:
4.1 Assuming that the company uses the CAPM to calculate its cost of equity. Calculate its
weighted average cost of capital. (17

Answer 1

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