Reference no: EM132642015

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 preference shares.

a) 6,6%
b) 10,15%
c) 6,50%
d) 12,67%