QUESTION 1(25 Marks)

REQUIRED: 1.1 Calculate the weighted average cost of capital using the Capital Asset Pricing model to calculate the cost of equity.(22 marks) 1.2 Calculate the cost of equity using the Gordons Growth model.(3 marks)

INFORMATION

You have been requested to calculate the cost of capital for SAS (Pty) Ltd. The following information has been provided on the capital structure of the company:

3000 000 Ordinary share with a market price of R2 per share. The latest dividend declared was 40 cents per share. A dividend growth rate of 10% is expected to be maintained for the immediate future.

1 000 000 10% R1 preference shares with a current market value of R 1.50 per share.

R2 000 000 6% Debentures due in 5 years. The current yield to maturity is 9%

R 600 000 10% bank loan due in April 2022

Additional information:

1. The company has a tax rate of 28%.

2. The beta of the company is 1.2, a risk-free rate of 6% and the return on the market is 12%.