QUESTION TWO $(25$ Marks$)$

Natal Limited uses a combination of shares and debt in their capital structure.

The details are given below: $-$

There are $3$ million R$4\mathrm{.}20$ ordinary shares in issue and the current market price is R$5\mathrm{.}90$ per share. The latest dividend paid

was $83$ cents and a $8\%$ average growth for the past six years were maintained. The company has $1750000$ R$2\mathrm{.}50,9\%$

preference shares with a market price of R$3\mathrm{.}80$ per share. Natal Limited has a public traded debt with a face value of R$5$

million. The coupon rate of the debenture is $8\%$ and the current yield to maturity of $11\%.$ The debenture has $7$ years to

maturity. They also have a bank overdraft of R$3$million due in $4$ years$$ time and interest is charged at $16\%$ per annum.

Natal Limited has a beta of $2\mathrm{.}3,$ a risk$-$free rate of $6\%$ and a return on the market of $16\%.$ The company tax rate is $30\%.$

Required:

$2\mathrm{.}1$ Calculate the weighted average cost of capital, using the Gordon Growth Model to calculate the cost of

equity.

$(22$

Marks$)$

$2\mathrm{.}2$ Calculate the cost of equity, using the Capital Asset Pricing Model.