Question

The present capital structure is as follows;

2 000 000 ordinary shares with a par value of R1.00 per share. These shares are

currently trading 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 yield to maturity 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.

Answer 1

$CARM=7+1.2(16-7)=17.8$

$r1=\frac{0.4(1+0.09)}{2.5}+0.09=0.2644$

$d2=2\times0.08=0.16$

$r2=\frac{0.16(1+0.09)}{1.8}+0.09=0.1869$

$capital=2 000 000\times1+1 500 000\times2+2 000 000 [phone]+1 000 000=18 000 000$

$WACC=\frac{2 000 000}{18 000 000}\times26.44+\frac{3 000 000}{18 000 000}\times18.69+\frac{10 000 000}{18 000 000}\times17.8+\frac{2 000 000}{18 000 000}\times10(1-0.3)+\frac{1 000 000}{18 000 000}\times15(1-0.3)=17.30$