Sheffield Manufactures Ltd, operate in the printing andpackaging industry. They feel that some of their older printing andlabelling machines need to be replaced. They seek help in order tocalculate their cost of capital. Their present capital structure isas follows: • 800 000 R2 ordinary shares now trading at R2.50 pershare. • 250 000 preference shares trading at R2 per share (issuedat R3 per share), at 10% fixed rate of interest. • A bank loan ofR1 500 000 at 13% p.a. (payable in 5 years’ time) Additional dataa. The company’s beta is 1.3. the return on the market is 14% andthe risk free rate is 7% b. Its current tax rate is 28% c. Itscurrent dividend is 40c per share and it expects its dividends togrow by 8% p.a. Required 1.1 Assuming that the company uses theDividend Growth Model to calculate its cost of equity. Calculateits weighed average cost of capital. (17) 1.1.1 If a further R500000 is needed to finance the expansion, which option should theyuse from ordinary shares, preference shares or loan financing andwhy? (3)
