2.2. You are given the capital structure of Oregon Engineering, a company based in Johannesburg, indicated below:

Debentures (R100 per debenture) R500,000

Preference Share (R100 per share) R500,000

Equity Shares (R10 per Share) R1,000,000

The Market prices of the securities are as given below:

Debentures R105 per Debenture

Preference Shares R110 per Preference Share

Equity Share R 24 each

Additional information

R 100 per debenture, redeemable at par, 10 % coupon rate, the applicable tax rate is 35%

R100 preference share, currently trading at R 110, 12% coupon rate.

The prevailing risk-free rate on T-Bills is 5.5%. The Average market risk premium is 8%. The beta of the company is 1.8.

Use the information provided above to answer the following questions.

2.2.1. Calculate the market value and weights for each source of capital (4)

2.2.2. Calculate the cost of each source of funding. Hint: The cost of equity should be calculated based on the Capital Asset Pricing Model (CAPM). (3)

2.2.3. Calculate the weighted average cost of capital (WACC) for Oregon Engineering