You have been appointed as a financial consultant by the directors of AI Tech Holdings. They require you

to calculate the cost of capital of the company and advise them accordingly. They intend to raise $1\mathrm{.}3$

million ordinary shares with a market price of R$3$ per share and $1$ million $12\%,$ R$1$ preference shares with a

market value of R$2$ per share. Furthermore, they are considering the following financing options to fund a

major expansion project:

R$10000008\%,$ Debentures due in $7$ years and the current yield$-$to$-$maturity is $10\%.$

R$80000014\%$ Bank loan, due in December $2029.$

Additional information:

$1.$ The company has a tax rate of $30\%.$

$2.$ The beta of the company is $1\mathrm{.}6,$ a risk$-$free rate of $6\%$ and the return on the market is

$20\%.$ The latest dividend declared was $90$ cents per share. A dividend growth of $8\%$ was

maintained for the past $5$ years.

$3.$ Round off all workings$/$answers to two decimal places where applicable.

Required:

$3\mathrm{.}1$ Calculate the weighted average cost of capital $($WACC$).$ Use the Capital Asset Pricing Model to

calculate the cost of equity.

$(20$ Marks$)$

$3\mathrm{.}2$ Calculate the cost of equity, using the Dividend Valuation $($Gordon Growth$)$ Model to calculate the

cost of equity and advise the directors as to which option to choose