QUESTION ONE

$[20]$

You have been appointed as a financial consultant by the directors of Chennai Holdings. They require you to calculate the cost of capital of the company.

The following information is available on the capital structure of the company:

$1500000$ Ordinary shares, with a market price of R$3$ per share. The latest dividend declared was $90$ cents per share. A dividend growth of $13\%$ was maintained for the past $5$ years.

$100000012\%,$ R$1$ Preference shares with a market value of R$2$ per share.

R$1000000$ Debentures due in $7$ years with a current market value of R $951356$ and a before tax cost of $10\%$

R$90000014\%$ Bank loan, due in December $2016$

Additional information:

The company has a tax rate of $30\%.$

The beta of the company is $1\mathrm{.}7,$ a risk free rate of $7\%$ and the retum on the market is $15\%.$

Required:

$1\mathrm{.}1$ Calculate the weighted average cost of capital $($WACC$).$ Use the Gorden Growth Model to calculate the cost of equity.

$1\mathrm{.}2$ Calculate the cost of equity, using the Capital Asset Pricing Model.

QUESTION TWO

$[15]$

The shareholders of Bee$-$Bee Company have voted in favour of a buyout offer from Honey Ltd$.$ The information pertinent to each firm is as follows:

Data

Bee$-$Bee

Honey

$\backslash$table$[[$PE Ratio,$4,12],[$Share in Issue,$120000,240000],[$Eamings $($after tax$)|,R360000,R720000$