QUESTION ONE [25]

You have been appointed as a financial consultant by the directors of Elsa 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:

1 500 000 - Ordinary shares, with a market price of R3 per share. The latest dividend declared was 90 cents per share. A dividend growth of 13% was maintained for the past 5 years.

1 000 000 - 12%, R1 Preference shares with a market value of R2 per share.

R1 000 000 - 9%, Debentures due in 7 years and the current yield-to-maturity (ytm) is 10%

. R250 000 - 14%, Bank loan.

Additional information:

1. The company has a tax rate of 30%.

2. The beta of the company is 1.4, a risk free rate of 9% and the return on the market is 18%.

3. Debentures are discounted at 4.8684 based on 10% ytm.

Required:

1.1 Calculate the weighted average cost of capital (WACC). Use the Gordon Growth Model to calculate the cost of equity. (22)

1.2 Calculate the cost of equity, using the Capital Asset Pricing Model