Corporate Finance

Question

Tugela Enterprises currently has 10 million ordinary shares in issue, which are selling for R8 each. The firm's recent financial statements reported earnings per share (EPS) of R1.40, and a return on equity (ROE) of 17.50%. The firm currently pays out 57% of earnings as dividends. Tugela has two debt issues:

1st Issue: Seventy-five thousand (75 000), 8% semi-annual coupon bonds, with a yield to maturity of 9.32% and 10 years to maturity.

2nd Issue: Sixty thousand (60 000), 6% semi-annual coupon bonds, with a yield to maturity of 6.7% and 6 years to maturity.

The tax rate is 30%.

Required:

1.1.1 Calculate Tugela’s cost of equity. (2 Marks)

1.1.2 Calculate Tugela’s weighted average after-tax cost of debt. (5 Marks)

1.1.3 Calculate Tugela’s weighted average cost of capital (WACC). (8 Marks)

1.2 Prepare a report for the Board of Directors of Tugela Enterprises discussing issues that might influence a company’s capital structure strategy. (10 Marks)

Q

Answer 1

1.1.1) Cost of Equity=DPS/CMV+GRD

where:

DPS=dividends per share, for next year

CMV=current market value of stock

GRD=growth rate of dividends​

1.1.2) The cost of debt formula is the effective interest rate multiplied by (1 - tax rate). The effective tax rate is the weighted average interest rate of a company’s debt.

1.1.3) WACC=E/V * Re + D/V ​* Rd * (1−Tc)

where:

Re = Cost of equity

Rd = Cost of debtE = Market value of the firm’s equity

D = Market value of the firm’s debt

V = E + D = Total market value of the firm’s financing

E/V = Percentage of financing that is equity

D/V = Percentage of financing that is debt

Tc = Corporate tax rate​

Will be happy to solve these for your particular question in a 1:1 session. Thanks!