QUESTION THREE Corporate Finance (25 Marks) Sky Traders uses a combination of shares and debt in their capital structure. The details are given below:

There are 3 000 000 R1.20 ordinary shares in issue and the current market price is R3.50 per share. The latest dividend paid was 92 cents and a 7% average growth for the past five years was maintained.

The company has 1 900 000 R2, 9% preference shares with a market price of R4.80 per share.

Sky Traders has a public traded debt with a face value of R3 500 000. The coupon rate of the debenture is 7% and the current yield to maturity of 12%. The debenture has 5 years to maturity.

They also have a bank overdraft of R900 000 due in 4years time and interest is charged at 12% per annum.

Additional Information: Sky Traders has a beta of 1.5, a risk-free rate of 7% and a return on the market of 16.5%. Company tax rate is 30%.

Required: 3.1 Calculate the weighted average cost of capital, using the Capital Asset Pricing Model to calculate the cost of equity.

(22 marks) 3.2 Calculate the cost of equity, using the Gordon Growth Model. (3 marks)