AutoZone Tyre Ltd wants to expand its production capacity by investing R10 million in new plant and machinery for the manufacturing of its new brand of tyres. The management of AutoZone Tyre Ltd prefers to maintain the present 35% debt, 55% equity and 10% preference shares capital structure. The company expects to have a net income of R1,8 million and bases its dividend payments on the residual theory. Debt financing may be obtained at an after-tax cost of 15%. Ordinary shares, which are currently selling for R38 a share, may be issued with a flotation costs of 15%. The firm will pay a dividend (D1) of R1,20 per share in the coming financial year and had a growth rate of 5% over the past few years. It is expected that this growth rate will be maintained in future. The company is contemplating issuing 9% preference shares that are expected to sell for a par value of R72 per share. The cost of issuing and selling the shares is expected to be 5%. The tax rate is 29%. Calculate the company’s weighted average costs of capital.
AutoZone Tyre Ltd wants to expand its production capacity by investing R10 million in new plant and machinery for the manufacturing of its new brand of tyres.
The management of AutoZone Tyre Ltd prefers to maintain the present 35% debt, 55% equity and 10%
Debt financing may be obtained at an after-tax cost of 15%. Ordinary shares, which are currently selling for R38 a share, may be issued with a flotation costs of 15%. The firm will pay a dividend (D1) of R1,20 per share in the coming financial year and had a growth rate of 5% over the past few years. It is expected that this growth rate will be maintained in future.
The company is contemplating issuing 9% preference shares that are expected to sell for a par value of R72 per share. The cost of issuing and selling the shares is expected to be 5%.
The tax rate is 29%.
Calculate the company’s weighted average costs of capital.
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