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Question 1 (Cost of Capital [15 marks] ABC Limited has the following optimal capital structure: Debt 25% Equity (ordinary shares 75%) The applicable tax
Question 1 (Cost of Capital [15 marks] ABC Limited has the following optimal capital structure: Debt 25% Equity (ordinary shares 75%) The applicable tax rate is 28% and their beta is 1.5. Investors expect earnings and dividends to grow at a contact rate of 12% in the future. The previous year a dividend of R11 per share was paid (Do). The current market price at which a share sells is R120. The risk-free rate is considered to be 10% and the market risk is 15%. Required: Determine the cost of ordinary shares for ABC Limited: (a)By using the Gordon constant growth model [5] (b) By using the Capital Asset Pricing Model(CAPM) [5] (c) What are the shortfalls of the CAPM [5] Show the formulas for the above calculations. Round off your answer to 2 decimal places.
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