QUESTION THREE $[25]$

The directors of Ideya Limited have appointed you as their financial consultant to calculate the cost of

capital for the company.

The present capital structure is as follows:

$$ Two million ordinary shares with a par value of $75$ cents per share. These shares are currently

trading at R$4\mathrm{.}50$ per share and the latest dividend paid is $30$ cents. An average dividend growth

of $13\%$ is maintained.

$$ One and a half million $14\%$ R$3\mathrm{.}00$ preference shares, with a market value of R$5\mathrm{.}00$ per share.

$$ R$2000000$ non$-$distributable reserves.

$$ R$8000008\%$ debentures due in $6$ years$$ time and the current yield$-$to$-$maturity is $6\%,$ and

$$ R$90000013\%$ bank loan.

Additional information:

$$ The company has a beta of $1\mathrm{.}7,$ a risk$-$free rate of $5\%$ and enjoys a premium of $8\%.$

$$ The company's tax rate is $30\%.$

Required:

$3\mathrm{.}1$ Calculate the weighted average cost of capital, using the Gordon Growth Model to calculate

the cost of equity. $(20)$

$3\mathrm{.}2$ Calculate the adjusted weighted average cost of capital, using the Capital Asset Pricing

Model as the cost of equity. $(5)$