treasury bonds are currently yielding a return of 7% after taxation, and the return on the market for the Johannesburg Stock Exchange has been calculated at 14%. Recent financial press report a close competitors Beta as being 1.6. You however consider your company to be more risky than this company and feel that a premium of 50% on the risk in excess of normal market risk, would be appropriate. The dividend per share for the current year was R2.10, and the dividend cover was 2 times. The company is currently trading at a price earnings ratio of 8 times. The preference shares are redeemable in 10 years, or alternatively, are convertible into ordinary shares on a 1 for 1 basis at the option of the shareholder in 5 years time. The company has forecast earnings per share to have risen to R15 per share at that time, and anticipate that the price earnings ratio will have improved to 10 times. The preference shares were originally issued at a nominal value of R20 000 000, in denominations of R100 per share, and pay a dividend of 20% p.a. If the preference shares are not converted into ordinary shares, they will be redeemed at a premium of 10% over nominal value. Similar preference instruments are currently demanding a return of 15%.
Rebu is a holding company with a 70% holding in one subsidiary. The subsidiaries operations are similar, and to a large degree are integrated into the holding company's operations. For practical reasons, the subsidiary cannot be valued separately to the holding company.
treasury bonds are currently yielding a return of 7% after
The company has 10% debentures in issue with a nominal value at issue of R10 000 000. The debentures pay interest on the 30 June and 31 December each year, and are redeemable at par in three years time. The debentures are currently trading at a cum interest price of R9 500 000, with interest due shortly.
The first long term loan is a loan from one of the original shareholders of the company. The shareholder does not intend to call the loan at any point in the future, as he is content to use the interest earnings only, and has indicated that his will has been drafted to leave the loan in place indefinitely on his death, with the interest accruing to a trust with his children as beneficiaries. The loan yields fixed interest of 15%, the risk profile of the loan is considered to be similar to treasury bonds.
The second long term loan consists of a loan repayable in 3 equal instalments starting in two years time (two years of interest, and then 3 years of repayments). The loan bears fixed interest at 12% p.a. Similar loans are currently yielding a market rate of 10%.
the accounts payable of the company consist of normal trade payables. R4 million of this balance is an amount that is payable for fuel to a bulk fuel supplier who provide long payment terms, and is considered to be long term in nature. This is used as a form of free finance, as the fuel supplier charges no interest on outstanding balances. The fuel supplier does normally allow a cash settlement discount to their clients if they settle immediately. The discount is 5% on the amount owning. The remaining accounts payable are spontaneous.
Included in accounts payable is a transaction to the value of R110 000 relating to "overseas research". The head of the research division, Mrs Joe CA(SA), incurred this expense while attending a research workshop in Paris relating to expanding delivery businesses in busy metropolitan areas. Mrs Joe, who is a director at Rebu, paid for all the expenditure herself and then claimed the money back from Rebu upon her return to South Africa. The amount of R110 000 included all traveling costs for her and her family, as well as the purchase of many gifts for herself, some Rebu office staff members as well as some of her family members. She was not able to submit any documents to support the amount of R110 000 as she stated that she had lost all supporting documents at the airport on the way back from Paris.
The company tax rate should be assumed to be 28%
Determine the weighted average cost of capital for Rebu. You should include an explanation for any items you do not include in the calculation
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