QUESTION 2 (25)

The directors of Ole Industries have appointed you as their financial consultant. They are seeking new project investments and require you to calculate the present cost of capital of the company. The capital structure is listed below: - 2 million ordinary shares, with a par value of 50 cents each, currently trading at R4 per share. The company

has a beta () of 1.4, a risk free (Rf) rate of 8% and a return on the market (Rm) of 18%.

• 1 million 13%, R2 preference shares, with a market value of R3 per share.
• R3 million 11%, debentures due in 5 years and the current yield-to-maturity is 8%.
• R900 000 16%. Bank loan, due in January 2012.
• The company also has a general reserve of R3 200 000 and a retained income of R3 000 000.

Additional information:

• The dividend growth of 11% per annum was maintained for the past 4 years. The latest dividend paidwas 80 cents per share.
• The company has a tax rate of 30%.

Required:

2.1 Calculate the weighted average cost of capital. Use the Capital Asset Pricing Model to calculate the cost of equity. (21)

2.2 Calculate the cost of equity, using the Gordon Growth Model. (4)