Reference no: EM133234271

A company had the following shares in issue at 31 May 2022:

50 000 Ordinary shares of R2 each

20 000 8% Convertible preference shares of R3 each

At that date the preference shareholders had the right to convert their preference shares into ordinary shares at a rate of 4 ordinary shares for every 10 preference shares held. All the preference shareholders exercised their right to convert their preference shares on 31 May 2022. If the preference shares were not converted, they would have been redeemable after 6 years at a discount of 4%.

The company had attributable profits of R100 000 for the year ended 31 May 2022 and expects these profits to grow at a constant rate of 9% per annum. The company has a fixed dividend pay-out ratio of 40%.

A fair rate of return for similar preference shares is 11% and for similar ordinary shares 23%.

Source: Hunde, T. (2022)

Required

Determine the value of one convertible preference share at 31 May 2022.

Note: Round your answers to two decimal places.

Question 6

What conditions should be met in order to obtain more reliable results when using the Gordon Dividend Growth Model to value a minority share?