Target capital structure: Capital structure component Debt Preference Equity Target weight 0.50 0.10 0.40 | Strawberry Bliss a successful South African makeup manufacturer, is considering expanding its production capacity. The following information has been provided to you: • Retained earnings: The company intends to raise funds through the issue of new ordinary shares only once any existing retained earnings have been depleted. It is expected that retained earnings of R900 000 will be available for the next financial period (2024). The company expects to pay a dividend of R7 per share in the next year. • • • The growth rate for dividends has been calculated to be 4.9%. Ordinary share: The share is currently priced at R80 per share. Should the company wish to raise funds through a share issue, it will have to discount the current price by an average discount of R8 per share, in addition to paying expected flotation costs of R4 per share. The extent of capital that can be sourced through the ordinary shares is considered to be unlimited. Debt: The company has an irredeemable debt in issue with a nominal value of R300 each. The bonds pay interest annually at a rate of 20%. The current market price of the bonds (ex-interest) is R180 per bond. Preference shares: The company can issue preference shares at a par value of R300 per preference share at an average discount of R20 per share with a flotation cost of R10 per share. The preference shares pay a dividend of 10%. The extent of capital that can be sourced through preference shares is considered to be unlimited. A tax rate of 27% is applicable.
Target capital structure: Capital structure component Debt Preference Equity Target weight 0.50 0.10 0.40 | Strawberry Bliss a successful South African makeup manufacturer, is considering expanding its production capacity. The following information has been provided to you: • Retained earnings: The company intends to raise funds through the issue of new ordinary shares only once any existing retained earnings have been depleted. It is expected that retained earnings of R900 000 will be available for the next financial period (2024). The company expects to pay a dividend of R7 per share in the next year. • • • The growth rate for dividends has been calculated to be 4.9%. Ordinary share: The share is currently priced at R80 per share. Should the company wish to raise funds through a share issue, it will have to discount the current price by an average discount of R8 per share, in addition to paying expected flotation costs of R4 per share. The extent of capital that can be sourced through the ordinary shares is considered to be unlimited. Debt: The company has an irredeemable debt in issue with a nominal value of R300 each. The bonds pay interest annually at a rate of 20%. The current market price of the bonds (ex-interest) is R180 per bond. Preference shares: The company can issue preference shares at a par value of R300 per preference share at an average discount of R20 per share with a flotation cost of R10 per share. The preference shares pay a dividend of 10%. The extent of capital that can be sourced through preference shares is considered to be unlimited. A tax rate of 27% is applicable.
ChapterP3: Part 3: Exchange Rate Risk Management
Section: Chapter Questions
Problem 4Q
Related questions
Question
Provide the formula and calculate the cost of new share issue
Provide the formula and calculate the WACC associated with the total new funding financing below the break-even point.
Transcribed Image Text:Target capital structure:
Capital structure component
Debt
Preference
Equity
Target weight
0.50
0.10
0.40
|
Transcribed Image Text:Strawberry Bliss a successful South African makeup manufacturer, is considering expanding its
production capacity.
The following information has been provided to you:
• Retained earnings: The company intends to raise funds through the issue of new ordinary
shares only once any existing retained earnings have been depleted. It is expected that
retained earnings of R900 000 will be available for the next financial period (2024). The
company expects to pay a dividend of R7 per share in the next year.
•
•
•
The growth rate for dividends has been calculated to be 4.9%.
Ordinary share: The share is currently priced at R80 per share. Should the company wish to
raise funds through a share issue, it will have to discount the current price by an average
discount of R8 per share, in addition to paying expected flotation costs of R4 per share. The
extent of capital that can be sourced through the ordinary shares is considered to be
unlimited.
Debt: The company has an irredeemable debt in issue with a nominal value of R300 each.
The bonds pay interest annually at a rate of 20%. The current market price of the bonds
(ex-interest) is R180 per bond.
Preference shares: The company can issue preference shares at a par value of R300 per
preference share at an average discount of R20 per share with a flotation cost of R10 per
share. The preference shares pay a dividend of 10%. The extent of capital that can be
sourced through preference shares is considered to be unlimited.
A tax rate of 27% is applicable.
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