LECTURE $1$: $28/07/2024$

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Cost of capital

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Lease or buy options

COST OF CAPITAL: QUESTION

You have been appointed as a financial consultant by the directors of Chennai Holdings. They require you to calculate the cost of capital of the company.

The following information is available on the capital structure of the company: $1500000$ Ordinary shares $($O$/$S$)$ with a market price $($MP$)$ of R$3$ per share. The latest dividend $($D$0)$ declared was $90$ cents per share. A dividend growth $($g$)$ of $13\%$ was maintained for the past $5$ years.

$100000012\%,$ R$1$ Preference shares $($P$/$S$)$ with a market value of R$2$ per share.

R$10000009\%,$ Debentures $($D$)$ due in $7$ years and the current yield$-$to$-$maturity $($YTM$)$ is $10\%.$

R$70000014\%$ Bank loan $($BL$),$ due in December $2025.$

Additional information: $1.$ The company has a tax rate $($Tc$)$ of $30\%.2.$ The beta of the company is $1\mathrm{.}6,$ a risk$-$free rate of $7\%$ and the return on the market is $15\%.$

Required: $1\mathrm{.}1$ Calculate the weighted average cost of capital $($WACC$).$ Use the Gordon Growth Model to calculate the cost of equity $($Ke$).(22$ marks$)1\mathrm{.}2$ Calculate the cost of equity $($Ke$),$ using the Capital Asset Pricing Model $($CAPM$)$