Shoprite Holding Ltd is the largest supermarket retailer on the African continent with more than 2 934 outlets. The company intends to raise R30 million to purchase a fleet of trucks to transport goods from various stores. The company will finance a fleet of trucks as follows: Debt (30%): The company will sell 5-year, 8% (paid quarterly) coupon bonds, each with a parvalue of R1 000 that could be sold at a premium of R50 with a flotation costs of 2.5% per bond. Ordinary shares (55%): The firm’s ordinary shares are currently selling for R50 per share. The dividend expected to be paid at the end of the coming year (2021) is R4. Its dividend payments per share in each of the past five years are shown in the table below: Year Dividend 2020 R3.75 2019 R3.50 2018 R3.30 2017 R3.15 2016 R2.85 It is expected that to attract buyers, new ordinary share must be under-priced by 10% per share and the firm must also pay R3 per share in flotation costs. Preference shares: Shoprite Holding Ltd will finance the rest of the money by issuing 12% preference shares that are expected to sell for a par value of R75 per share. The cost of issuing and selling the shares is expected to be 7%. Assume a tax rate of 29% Determine Shoprite Holding Ltd’s weighted average cost of capital.
Shoprite Holding Ltd is the largest supermarket retailer on the African continent with more than 2 934 outlets. The company intends to raise R30 million to purchase a fleet of trucks to transport goods from various stores.
The company will finance a fleet of trucks as follows:
Debt (30%): The company will sell 5-year, 8% (paid quarterly) coupon bonds, each with a parvalue of R1 000 that could be sold at a premium of R50 with a flotation costs of 2.5% per bond.
Ordinary shares (55%): The firm’s ordinary shares are currently selling for R50 per share. The dividend expected to be paid at the end of the coming year (2021) is R4. Its dividend payments per share in each of the past five years are shown in the table below:
Year Dividend
2020 R3.75
2019 R3.50
2018 R3.30
2017 R3.15
2016 R2.85
It is expected that to attract buyers, new ordinary share must be under-priced by 10% per share and the firm must also pay R3 per share in flotation costs.
Assume a tax rate of 29%
Determine Shoprite Holding Ltd’s weighted average cost of capital.
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