African Oxygen Limited (Afrox) is sub-Saharan Africa’s market leader in gases and welding products. Afrox was founded in 1927, listed on the JSE in 1963, and has prospered by constantly meeting the needs of customers and developing solutions that add value to customers’ applications. Afrox operates in South Africa and in 10 other African countries and manages operations in five more on behalf of their parent company, The Linde Group, a global gases, engineering and technology company. Their processes include blanketing, purging and sparging.

To ensure safe and efficient cost effective sparging, Afrox Ltd has proposed to acquire a new reactor that uses dry gas, that is, gaseous liquid nitrogen (GLN).  The new reactor will cost N$4 500 000 and will guarantee annual cost savings of N$3 600 000. The incremental costs are N$2 300 000 per annum and the new reactor is estimated to have a life span of 5 years.

The capital structure of Afrox Ltd include the following:

• 600 000 N$2 ordinary shares currently trading at N$2.40 per share.
• 200 000 preference shares trading at N$2.50 per share (issued at N$3 per share). 10 % p.a. fixed rate of interest.
• A bank loan of N$1 000 000 at 12 % p.a. (payable in five years’ time)

Additional information

• The company’s beta is 1,4. A return on market of 15% and a risk-free rate of 6%.
• Current tax rate is 28 %.
• Current dividend is 50c per share and dividends are expected to grow by 7 % per annum, forever.