QUESTION 1 [10 MARKS] Delta Bank plans to issue 10 000, 10-year, 15% coupon bonds. Each bond will be issued at a par value of R1 000. To make the bonds attractive to investors, the bank plans to issue them at a discount of 2.5%. (Show Calculations) 1.1 If the issue will result in flotation costs of 3% being incurred, what is the YTM? (3)

1.2 Assuming that Delta Bank is taxed at 25%, what is the after-tax cost of the bond (2)

1.3 Delta Bank also plans to issue 500 000 ordinary shares at R100 per share. Flotation costs on the new shares are expected to be R2.50 per share. Delta Bank has just paid a dividend of R5 per share on its existing ordinary shares. Dividends on ordinary shares are expected to grow at 10% per annum into the foreseeable future. Using Gordons dividend growth model, calculate the cost of the ordinary shares.(3)

1.4 To preserve its current capital structure, Delta Bank also plans to issue 100 000, 15% preference shares with a par value of R50 per share. Flotation costs on the preference shares are expected to amount to R2.50 per share. Using the information given above, calculate the cost of Delta Banks preference shares. (2)