QUESTION 4: Cost of capital 4.1 XYZ Ltd has an equity beta of 1.30, market risk premium is expected to be 6%, and the yield on government bonds is currently 9%. XYZ Ltd issued bonds (R100 par value) that are currently trading at R80 and have an 8% coupon rate. The corporate tax rate is currently 28% and the maturity date of the bonds is in five years. Using the CAPM, calculate the cost of equity and the markets overall expected rate of return (Rm). Thereafter, interpret these values.

4.2 XYZ Ltd paid a dividend of R0.15 per share and the dividend is expected to grow at 9% annually. Currently, the share price is R1.50. What is XYZs cost of equity based on the dividend growth model? 4.3 Considering your answers on the two questions above, discuss the main differences between the CAPM and dividend growth model.