QUESTION 1 (53 marks)
You are a Financial Consultant, and the following cases currently require your attention:
CASE 1: MR. HEMINGWAY
Mr. Hemingway wishes to purchase non-redeemable, non-cumulative converting preference shares in Scribner Ltd today. These preference shares have an issue price of R90 and conversion date of 30 September 2026. The preference dividend rate is 8.8% per annum, payable quarterly in arrears (including on the conversion date). These preference shares convert at a 7.5% discount to the prevailing market price of ordinary shares in Scribner Ltd. The expected price of the ordinary shares on the conversion date is R64 per ordinary share. Similar preference shares offer a return of 7.2% per annum.
CASE 2: MRS. AUSTIN
Mrs. Austin is interested in acquiring ordinary shares in Egerton Ltd and requires assistance determining the current worth of each ordinary share. During the 2025- year a dividend of 35 cents per share had been declared and the trading price is R28 per share. It is expected that the ordinary shares’ dividend will grow at a rate of 9.5% per year for the next 6 years. Thereafter, a sustainable growth rate of 4.3% per year is expected. Similar ordinary shares offer a yield of 6.3% per year.
CASE 3: ABC LTD
ABC Ltd (“ABC”) is a retailer with outlets nationwide. The entity plans to open a new outlet in the Free State. ABC will however require funding to the value of R1 550 000. The entity is considering issuing 11.2% cumulative, non-redeemable preference shares. Similar preference shares offer a yield of 11.75%. Each preference share will have a nominal value of R10. During the first four years, no dividends will be paid for ABC to retain the funds for the future development of the outlet. Thereafter, ABC will pay the annual dividends on these preference shares.
CASE4: XYZ LTD
XYZ Ltd (“XYZ”) is considering performing a rights issue with a subscription price of R58 per share in order to obtain a total funding of R120 000 000. Currently, XYZ’s ordinary shares are trading at R60 each on the JSE. XYZ has recently declared and paid a dividend to these shares in line with the entity’s dividend payout ratio of 8.8% of the net profit after taxation. This dividend payout ratio is deemed to be maintained in the future. XYZ has 250 000 000 ordinary shares in issue.
REQUIRED:
Refer to CASE 1: MR. HEMINGWAY. Assist Mr. Hemingway by calculating the value today, of each Scribner Ltd preference share.
Assume today is 30 June 2025 and that the preference shares are still cum- dividend.
(13 marks)
Communication skill: Presentation (1 mark)
Refer to CASE 2: MRS. AUSTIN. Assist Mrs. Austin in determining the current worth of each Egerton Ltd ordinary share.
Supplement your answer by advising her whether it is worth acquiring an Egerton Ltd ordinary share at the moment. Motivate your advice.
Assume today is 1 January 2026.
(20 marks)
Communication skill: Logical argument (1 mark)
Refer to CASE 3: ABC LTD. Calculate the current value of each preference share.
(12 marks)
Refer to CASE 4: XYZ LTD. Determine the value of XYZ Ltd ordinary shares’ expected ex-right price per right.
Answers to Above Questions on Strategy, Risk and Financial Management
Expert Answer 1:
In order to calculate the value today of each Scribner Ltd reference share assuming today is 30 June 2025, it is important to perform a series of calculations. The step one requires the calculation of quarterly preference dividend, step to requires the calculation of conversion value, step 3 includes finding the required quarterly discount rates, step 4 is finding the number of periods, step 5 includes the calculation of present value of dividend and present value of conversion value, and final step includes the addition of two present values as calculated. These steps are indicated as follows:
Step 1: Calculation of quarterly preference dividend
PD = issue price multiple dividend rate and divided by 4
=R90*8.8%/4
=R1.98 per quarter
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