QUESTION ONE

You have been appointed as a financial consultant by the directors of Menz Limited. They require you to determine the cost of capital of the company.

The following information is available on the capital structure of the company: 1 000 ordinary shares, with a market price of R40 per share. The latest dividend declared was R5 per share. A dividend growth of 12% was maintained for the past 5 years. Cash reserves equal to R100 000. 500 13%, R30 preference shares, with a market value of R32 per share. R20 000 10%, debentures due in 5 years and the current yield-to-maturity is 11%. R12 000 15%, bank loan, due in December 2026.

Additional information: The company has a tax rate of 28%. The beta of the company is 1.2, a risk free rate of 7% and the return on the market is 12%.

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

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