QUESTION FOUR

Lenovo Limited uses a combination of shares and debt in their capital structure.

The details are given below:

- There are 500 000 ordinary shares in issue with a par value of R0.80 each and the current market price is R1.20 per share. The latest dividend paid was R0.22 and a 11% average growth for the past five years was maintained.

- The company has 200 000 R1, 9% preference shares with a market price of R1.80 per share.

- Lenovo Limited has a public traded debt with a face value of R500 000. The coupon rate of the debenture is 6% and the current yield to maturity of 9%. The debenture has 5 years to maturity.

- They also have a bank overdraft of R300 000 due in 5 years time and interest is charged at 14% per annum.

Additional Information:

- Lenovo Limited has a beta of 1.7, a risk-free rate of 8% and a return on the market of 12%.

- Company tax rate is 28%.

4.1 Calculate the weighted average cost of capital, using the Gordon Growth Model to calculate the cost of equity (22 marks)

4.2 Calculate the cost of equity, using the Capital Asset Pricing Model. (3 marks)