only question 5

Cost of Capital During the last few years, Harry Davis PVT Ltd (HDPL) has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program that has been proposed by the marketing department. Assume that you are the company financial analyst. Your task is to estimate HDPL's cost of capital. Finance manager of HDPL has provided you with the following data, which she believes may be relevant to your task. A) Dividend just paid $2.35 B) Expected dividend growth rate 5% c) Current share price $44 D) Beta of company ordinary share -0.87 E) Risk free rate of return 3.6% F) Expected return on the market -11% G) Capital structure is 75% equity and 25% Debt H) Cost of debt -5.8% 1) Company tax rate=30% 15 Required 1. Calculate cost of equity using the dividend growth model marks) Cost of cavity (r) = 01/pos where pO44, D1= 2.47. E= 5% -2.47/44-5% I 10.6196 2. Calculate cost of equity using the Capital asset pricing model (CAPM) 15 marks Cost of equity - Rf-Bewhere Rf= 3.6%, B=0.87 Rp 7.4% = 3.6%+0.87x7.4% =10.04 of 15 32 of 2426 words English tralia Styles Editing Voice Sensitivity Editor Grammarly 5.-7.1 81.9 110 111 112 113 114 115 11718 4 Cost (96) Market Value MV Structura WACOLGAN (S) weight Cost of equity 10.61 75 0.75 7.96% 4.06 25 0.25 1.02% Debt (after tax cost) (5.8%x{1-30%) Total 100 1.00 8.9896 Hence Weighted average cost of capital is 8.98% equity in 2 above (CAPM) 4. Calculate WACC using cost 15 marks) Cost (9) Market Value MV Structure WACCL ($) weight Cost of equity 10.04 75 0.75 7.53% 25 0.25 1.02% Debt (after tax cost) Total 4.06 (5.8%-30%) 100 100 8.55% Hence Weighted average cost of capital is 8.55% 5. Compare and contrast the advantages and disadvantages of using dividend growth Opdal (GM) bused cost of equity, and Capital Asset Pricing Model (CAPM) based cost of uitv for determining the WACC) D. Focus 5. Compare and contrast the advantages and disadvantages of using dividend growth Oodel (DGM) based cost of equity, and Capital Asset Pricing Model (CAPM) based cast of equity for determining the WACC? (5 marks) o