QUESTION TWO

$[25]$

The directors of Lector Industries have appointed you as their financial consultant. They are seeking new project investments and require you to calculate the present cost of capital of the company.

The capital structure is listed below:

$2$ million ordinary shares with a par value of $50$ cents each, currently trading at R$4$ per share. The company has a beta $()$ of $1\mathrm{.}4,$ a risk free $($Rf$)$ rate of $9\%$ and a return on the market $(Rm)$ of $17\%.$

$1\mathrm{.}5$ million $13\%,$ R$2$ preference shares, with a market value of R$2\mathrm{.}5$ per share.

R$3$ million $11\%,$ debentures due in $5$ years and the current yield$-$to$-$maturity is $8\%.$

R$80000016\%.$ Bank loan.

The company also has a general reserve of R$3500000$ and a retained income of R$4000000.$

Additional information:

The dividend growth of $12\%$ per annum was maintained for the past $4$ years. The latest dividend paid was $80$ cents per share.

Assume a company tax rate of $30\%.$

Required:

$2\mathrm{.}1$ Calculate the weighted average cost of capital. Use the Capital Asset Pricing Model to calculate the cost of equity.

$2\mathrm{.}2$ Calculate the cost of equity, using the Gordon Growth Model.

$(3)$