QUESTION 3

Vendata Resources seeks to invest R10 million in a new mining project in order to expand its gold production capacity. The management of the company prefers to maintain the present 35% debt, 55% equity and 10% preference shares capital structure.

Debt financing can be obtained by issuing a 5-year R1 000 bond. The current price of the bond is R1 123 and it pays 10% coupons.

Vendata Resources has a beta of 1.3. The expected return on the market portfolio is 16% and the current risk-free rate is 8%.

The company is contemplating issuing 10% preference shares that are expected to sell for a par value of R60 per share. The cost of issuing and selling the shares is expected to be 5%. The tax rate is 29%.

REQUIRED

1. Calculate Vendata Resources component costs. (11 marks)

2. Calculate the companys weighted average costs of capital. (9 marks) [TOTAL 50]