The directors of CSR 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 R4 per share. The company has a beta () of 1.4, a risk free (Rf) rate of 9% and a return on the market (Rm) of 17%. 1.5 million 13%, R2 preference shares, with a market value of R2.5 per share. R3 million 11%, debentures due in 5 years and the current yield-to-maturity is 8%. R800 000 16%. Bank loan. The company also has a general reserve of R3 500 000 and a retained income of R4000 000.

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:

4.1 Calculate the weighted average cost of capital. Use the Capital Asset Pricing Model to calculate the cost of equity.

4.2 Calculate the cost of equity, using the Gordon Growth Model