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Calculate the cost of equity for plastic manufacturing

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Reference no: EM132642012

You have been provided with the following information with respect to the capital structure of a plastic manufacturing plant:

Equity Ordinary share capital R3 000,000

Non-redeemable preference shares R6 000,000

Debt Bonds R3 500,000

  1. The current risk-free rate is 7,1%, while the current return on the market is 13,2%. The company's beta to the market is 1,3.
  2. The non-redeemable preference shares were issued at R6 per share. An annual dividend of 11% is paid at the end of every year. The shares are currently trading at R6,50 per share.
  3. The 12% bonds are redeemable at a premium of 15% above the par value of R1 000 in five years' time. Similar bonds are currently trading at R990. Coupons are paid annually.
  4. The company tax rate is 28%.

Problem 1: Calculate the cost of equity.

a) 24,26%
b) 15,03%
c) 7,1%
d) 13,2%

Reference no: EM132642012

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