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Question 3 ( 2 5 Marks ) You have been appointed as a financial consultant by the directors of Riyadh Holdings. They require you to

Question 3(25 Marks)
You have been appointed as a financial consultant by the directors of Riyadh Holdings. They require you to calculate 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 R3 per share. The latest dividend
declared was 95 cents per share. A dividend growth of 10% was maintained for
the past 5 years.
100000012%, R1 Preference shares with a market value of R2 per share.
R10000009%, Debentures due in 7 years and the current yield-to-maturity is 10%.
R80000014% Bank loan, due in December 2017.
Additional information:
1. The company has a tax rate of 30%.
2. The beta of the company is 1.6, a risk-free rate of 6% and the return on the market is
15%.
3. Round off all workings/answers to two decimal places where applicable.
Required:
3.1 Calculate the weighted average cost of capital (WACC). Use the Gordon Growth Model to calculate the
cost of equity.
(22 marks)
3.2 Calculate the cost of equity, using the Capital Asset Pricing Model. (3 marks)

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