FIN3701 Assignment 2 Semester 1
2022
, FIN3701
3
Assignment 2 Semester 1 2022
Unique number: 614041
QUESTION 1
Blue Valley Ltd is interested in measuring its overall cost of capital. The cost of capital will
be used to evaluate potential investment projects. The company’s bookkeeper has gathered
the following data.
Ordinary shares (55%): Blue Valley Ltd reported retained earnings of R3 800 000 in the
previous year. The company paid a dividend of R2,35 on each of its 900 000 ordinary shares
issued. The market price of the ordinary shares is R55,00 and dividends are expected to
grow at a rate of 8% per year for the foreseeable future. Underpricing and flotation costs
amount to R12,00 when the company issues new shares.
Preference shares (15%): The company can issue a R3,00 dividend and preference shares
at a market price of R23,00 per share. Flotation costs would amount to R1,50 per share.
Long-term debt (30%): R1 000,00 par value, 10% coupon, five-year bonds that could be sold
for R1 200,00 will be issued with a flotation costs of R25,00 per bond.
The company is in the 28% tax bracket.
Disclaimer
Extreme care has been used to create this document, however the contents are provided “as is”
without any representations or warranties, express or implied. This document is to be used for
comparison, research and reference purposes ONLY. No part of this document may be
reproduced, resold or transmitted in any form or by any means without prior written permission
from the author.
2022
, FIN3701
3
Assignment 2 Semester 1 2022
Unique number: 614041
QUESTION 1
Blue Valley Ltd is interested in measuring its overall cost of capital. The cost of capital will
be used to evaluate potential investment projects. The company’s bookkeeper has gathered
the following data.
Ordinary shares (55%): Blue Valley Ltd reported retained earnings of R3 800 000 in the
previous year. The company paid a dividend of R2,35 on each of its 900 000 ordinary shares
issued. The market price of the ordinary shares is R55,00 and dividends are expected to
grow at a rate of 8% per year for the foreseeable future. Underpricing and flotation costs
amount to R12,00 when the company issues new shares.
Preference shares (15%): The company can issue a R3,00 dividend and preference shares
at a market price of R23,00 per share. Flotation costs would amount to R1,50 per share.
Long-term debt (30%): R1 000,00 par value, 10% coupon, five-year bonds that could be sold
for R1 200,00 will be issued with a flotation costs of R25,00 per bond.
The company is in the 28% tax bracket.
Disclaimer
Extreme care has been used to create this document, however the contents are provided “as is”
without any representations or warranties, express or implied. This document is to be used for
comparison, research and reference purposes ONLY. No part of this document may be
reproduced, resold or transmitted in any form or by any means without prior written permission
from the author.
