****PLEASE ANSWER ALL SUB-QUESTIONS AND EXPLAIN STEP BY STEP, PLEASE INCLUDE FORMULAE IN CORRECT FORMAT NOT COMPUTED VERSIONS, PLEASE INCLUDE NOMENCLATURE FOR ALL FORMULAE USED. THANK YOU FOR THE ASSISTANCE! ** PLEASE ANSWER THE ENTIRE QUESTION UNTIL THE END****

QUESTION ONE

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:

• 1 500 000 Ordinary shares, with a market price of R3 per share. The latest

  dividend declared was 90 cents per share. A dividend growth of 13% was

  maintained for the past 5 years.

• 1 000 000 12%, R1 Preference shares with a market value of R2 per share.

• R1 000 000 Debentures due in 7 years with a current market value of R 951 356

  and a before tax cost of 10%

• R900 000 14% Bank loan, due in December 2016

  Additional information:

• 1. *the company has a tax rate of 30%

     *the beta of the company is 1.7; a risk free rate of 7% and the return of the market is 15%

     REQUIRED:

     1.1 Calculate the weighted average cost of capital (WACC). Use the Gorden Growth Model to calculate the cost of equity.

  2. 1.2 Calculate the cost of equity, using the Capital Asset Pricing Model.