Dobby Traders uses a combination of shares and debt in their capital structure. The details are given below: There are 2 million R1.80 ordinary shares in issue and the current market price is R3.50 per share. The latest dividend paid was 50 cents and a 9% average growth for the past six years was maintained. The company has 1 500 000 R3, 8% preference shares with a market price of R2.80 per share. Dobby Traders has a public traded debt with a face value of R8 000 000. The coupon rate of the debenture is 7% and the current yield to maturity of 15%. The debenture has 8 years to maturity. They also have a bank overdraft of R4 000 000 due in 3 years time and interest is charged at 15% per annum. Additional Information: Dobby Traders has a beta of 1.5, a risk-free rate of 6.9% and a return on the market of 15.5%. Company tax rate is 30%.

Required: 2.1 Calculate the weighted average cost of capital, using the Capital Asset Pricing Model to calculate the cost of equity. (20 marks)

2.2 Calculate the cost of equity, using the Gordon Growth Model.