QUESTION TWO [25]

Assume you have been appointed as the director of Delta Holdings and that you are to calculate the cost of capital of the company on the following proposed capital structure of the company: 1 500 000 ordinary shares with a market price of R3 per share. The latest dividend declared was 90 cents per share. A dividend growth of 13% was maintained for the past 5 years. 1 000 000 12% R1 preference shares with a market value of R2 per share. R1 000 000 9% debentures due in 7 years and the current yield-to-maturity is 10% R1 100 000 14% bank loan, due in December 2023. Additional information

1. The company has a tax rate of 30%

2. The beta of the company is 1.8, a risk-free rate of 7% and the return on the market is 15%.

Required:

2.1. Calculate the weighted average cost of capital (WACC). Use the Gordon Growth Model to calculate the cost of equity. (21)

2.2. Calculate the cost of equity using the capital asset pricing model (CAPM) and calculate the adjusted WACC based on CAPM