Busiki Ltd wishes to calculate its weighted average cost of capital, and the following related to the company at the current.

Number of ordinary shares-20 million

Book value of 7% convertible debt-K29 million

Book value 8% bank loan-K2 million

Market price of ordinary shares -K5.50 per share

Market value convertible debt-K107/11 per K100 bond

Equity beta of Busiku Ltd-1.2

Risk - free rate return-4.7%

Equity risk premium-6.5

Rate of taxation-30%

Busiku Ltd expects share prices to rise in the future at an average rate of 6% per year.

The convertible debt can be redeemed at par in eight years time or converted in six years time into 15 shares of Busiku Ltd per K100 bond.

Required

a)Calculate the market average cost of capital of Busiku Ltd. State clearly any assumptions that you make.

b)Discuss whether the dividend growth model offers the better estimate of equity.