Answer to Question #319312 in Management for tera

Question

The directors of Thor Limited appointed you as financial consultant. They considering new investment projects and need you to calculate cost of capital for the company. The present capital structure is as follows; 2000000 ordinary shares with a par value of R1.00 per share. These shares currently trade at R2.50 per share and the latest dividend paid is 40 cents. An average dividend growth of 9% is maintained. 1 500 000 8% R2.00 preference shares, with a market value of R1.80 per share. R10 000 000 non- distributable reserves R2 000 000 7% debentures due in 6 years time and the current YTM is 10%, and R1 000 000 15% bank loan. Additional information: The company has a beta of 2.1 a risk free rate of 7% and a return of market of 16%. The company tax rate is 30%. Required 3.1 Calculate the weighted average cost of capital using Gordon growth model to calculate the cost of equity. (7) 3.2 Calculate the adjusted weighted average cost of capital using capital asset pricing model as the cost of equity. 

Answer 1

the cost of capital is 19.5%