Question $2$

$(25$ marks$)$

You have been appointed as a financial consultant by the directors of Baron Holdings. They require you to determine the cost of capital of the company.

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

$1500000$ ordinary shares, with a market price of R$3$ per share. The latest dividend declared was $86$ cents per share. A dividend growth of $15\%$ was maintained for the past $5$ years.

$100000011\%,R1$ preference shares, with a market value of R$3$ per share.

$$ R$10000009\%,$ debentures due in $7$ years and the current yield$-$to$-$maturity is $10\%.$ Note that the current price of the debenture is $R951356$

$$ R$70000014\%,$ bank loan, due in December $2021.$

Additional information:

The company has a tax rate of $30\%.$

The beta of the company is $1\mathrm{.}7,$ a risk free rate of $5\%$ and the return on the market is $14\%.$

Required:

$2\mathrm{.}1$ Calculate the weighted average cost of capital. Use the Gordon Growth Model to calculate the cost of equity

$(22$ marks$)$

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

$(3$ marks$)$