QUESTION TWO $[20]$

Lapti Ltd has the following capital structure:

$$ Equity: $3000000$ R$1$ ordinary shares, market price currently R$1,50$

$$ Preference Shares: $2000000$ @ R$0\mathrm{.}50$ yielding $10\%,$ market price currently R$0\mathrm{.}50$

$$ Debentures: R$1000000,15\%$ debentures, issued at R$100,$ market price

currently R $106,00$

$$ Bank loan: R$100000015\%$ bank loan

They have paid a dividend of $10$c per share last year and they expect dividends to grow by

$5\%.$ The corporate tax is $30\%.$

Required:

$2\mathrm{.}1.$ Calculate their Cost of Capital, using the Dividend Growth Model as your basis for valuing

equity. $(16)$

$2\mathrm{.}2.$ Discuss two disadvantages of the Capital Asset Pricing Model approach. $(2)$

$2\mathrm{.}3.$ Discuss two advantages of investing in bonds.