QUESTION TWO [25]

Eseyl Industries Ltd uses a combination of shares and debt in their capital structure. Details of their capital structure are provided below: There are 12 000 000 R6 ordinary shares in issue and the current market price is R11 per share. The latest dividend paid was R1.62 and a 11% average growth for the past six years was maintained. The company has 5 200 000 R6, 12% preference shares with a market price of R7.80 per share. The company has a public traded debt with a face value of R17 000 000. The coupon rate of the debenture is 11% and the yield to maturity of 16%. The debenture has 5 years to maturity. The company also has a bank overdraft of R7 000 000 due in 4 years time and interest is charged at 16% per annum. Additional information: 1. The company has a beta of 2.1, a risk-free rate of 8.9% and a return on the market of 17.3%. 2. Company tax rate is 28%. Required:

2.1. Calculate the weighted average cost of capital, using the Gordon Growth Model to calculate the cost of ordinary shares. (22)

2.2. Calculate the cost of ordinary shares, using the Capital Asset Pricing Model. (3)