Question

QUESTION 2: S.B.Consult Ltd, recognized as the leader in hospital supplies, has received an invitation to supply FBC, ECG, and dental machines to Justab Hospital in Kasoa. The contract will be for 10 years, and management is considering appraising the investment to enable them present their proposals for the contract.

The following information was extracted from the recently published accounts of S.B. Consult Ltd.

	GH¢ ‘000
Equity Shares (1,000,000 shares)	70,000
15% Preference shares	50,000
10% (Bonds irredeemable)	30,000
Total	150,000

The Treasury unit of S.B.Consult Ltd has estimated that it will require GH¢ 10 million to finance the new project. The total amount would be raised through 10% Irredeemable bonds at the current market price. The cost of Preference shares and Bonds will not change but equity shareholders will demand an increase of 20% on the current cost of equity. S.B.Consult Ltd has a beta of 0.8, the market risk premium for the steel industry is 6.25%, and the Government of Ghana Bond rate is 20%. The current market price for Irredeemable Bonds of GH¢1,000 nominal value is GH¢850. S.B. Consult Ltd’s dividend policy is to pay constant dividend and this policy will not change into the foreseeable future. The recent dividend paid was GH¢20 per share. S.B. Consult Ltd is a Free Zones Company and therefore pays tax at a rate of 8%.

Required: i) Calculate the current market capitalization of S.B. Consult Ltd.

(Hint: ?=??+ ? (??−??))

Answer 1