QUESTION 3 (25 Marks)

Bingo Traders uses a combination of shares and debt in their capital structure. The details are given below: There are 8 000 000 R5 ordinary shares in issue and the current market price is R7.70 per share. The latest dividend paid was 89 cents and a 11% average growth for the past eight years was maintained. The company has 4 400 000 R5, 10% preference shares with a market price of R6 per share. Bingo Traders has a public traded debt with a face value of R14 000 000. The coupon rate of the debenture is 10% and the current yield to maturity of 13%. The debenture has 6 years to maturity. They also have a bank overdraft of R6 000 000 due in 3 years time and interest is charged at 15% per annum.

Additional Information:

Bingo Traders has a beta of 1.6, a risk-free rate of 7.1% and a return on the market of 17.7%.

Company tax rate is 30%.

Required:

3.1 Calculate the weighted average cost of capital, using the Capital Asset Pricing Model to calculate the cost of equity. (22 marks)

3.2 Calculate the cost of equity, using the Gordon Growth Model. (3 marks)