QUESTION $1[30$ MARKS$]$

You have been appointed as a financial consultant by the directors of Umdoni Ltd$,$ a pulp and paper factory in Kwazulu$-$

Natal. The company intends to undertake a business expansion project and they require you to calculate the cost of capital

of the company.

The following information is available on the capital structure of the company:

$2500000$ Ordinary shares, with a nominal value of R$2$ and a market price of R$2\mathrm{.}5$ per share. The

latest dividend declared was $95$ cents per share. A dividend growth of $8\%$ was maintained

for the past $5$ years.

$100000012\%,$ R$1$ Preference shares with a market value of R$2$ per share.

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

R$90000011\%$ Bank loan, due in December $2029.$

Additional information:

$1.$ The company has a tax rate of $27\%.$

$2.$ The beta of the company is $1\mathrm{.}6,$ a risk$-$free rate of $7\%$ and the return on the market is

$14\%.$

Required:

$1\mathrm{.}1$ Calculate the weighted average cost of capital $($WACC$)$ for Umdoni Ltd$.$ Use the Gordon Growth Model to

calculate the cost of equity.

$(20)$

$1\mathrm{.}2$ Calculate the cost of equity, using the Capital Asset Pricing Model. $(3)$

$1\mathrm{.}3$ Umdoni Ltd aims to improve its cash flow position in order to become a cash$-$rich business entity. Suggest ways

that the company can employ to seek the best return at the least risk.