QUESTION 3

Peoples Limited has the following securities in issue: 1 million ordinary shares currently trading at N$1.30 each. The last dividend paid amounted to 15.5 cents and the earnings and dividends of Peoples are expected to grow at 4% per annum. 250 000 non-redeemable 7% preference shares with a nominal value of N$1.10 each. These shares are currently trading at N$0.65 per share. 1 550 12% unsecured bonds with a nominal value of N$100 each currently trading at N$85 each. These bonds are redeemable in 3 years time at the nominal value. Required: (a) Calculate the weighted average cost of capital for Peoples Limited using market values. (b) Is there another way to calculate the weighted average cost of capital? Support your answer with a brief explanation. Define all terms used in your answer.