QUESTION 1 (22 marks)

CoreOre Limited is financed as follows:

Non-distributable reserves Long-term loans

200 million ordinary shares Retained Income

Bonds

Their target capital structure is (D:E) 40:60.

R'000

133 000 98 500 200 000 9 555 170 800

The shares are currently trading at R320 per share. Investors expect earnings and dividends to grow at a constant rate of 8% in the future. The previous dividend that was paid amounted to R4,60 per share.

The cost of debt before tax is 13%. The risk-free rate is considered to be 8,5% and the market return is 15%.

The current tax rate is 28% and their beta is 1,1.

REQUIRED:

a) Show the components of total equity financed amounts as well as the components of debt financed amounts separately, then calculate the capital structure of CoreOre Limited

(based on book values). [Round your answer to the nearest full percentages.] (6)

b) CoreOre needs to raise R30 million for a project. Advise them on how they should finance the new project keeping the target capital structure in mind.

(Show all the relevant calculations.) (4)

c) Calculate the cost of ordinary shares (cost of equity) by using the capital asset pricing model (CAPM) approach. [Round your answer to two decimal places.] (4)

d) Calculate the WACC using the target capital structure. Use the cost of ordinary shares (cost of equity, Ke) as calculated in (c). [Do not round the answer in (c) to the nearest full percentage.] (8)