Capri Limited intends raising finance for a proposed new project. The financial manager has provided the following information to determine the present cost of capital to the company:

The capital structure consists of the following:

■ 2 million ordinary shares issued at R2 each but currently trading at R3 each. The company’s beta coefficient is 1.4. The risk-free rate is 9%. The return on the market is 17%.

■ 1 million 12%, R2 preference shares with a market value of R3 per share.

■ R1 000 000 20% Bank loan, due in January 2026.

Additional information

■ The Capital Asset Pricing Model is used to determine the cost of equity.

■ A dividend growth of 10% per annum on ordinary shares was maintained over the past five years. The latest dividend paid was 80 cents per share.

■ Assume that the company tax rate is 28%.

Calculate the weighted average cost of capital (calculations expressed to two decimal places, where applicable). (16 marks)

Calculate the cost of equity using the Gordon Growth Model (expressed to two decimal places). (4 marks)

Answer rating: 100% (QA)

1 Cost of equity using CAPM Ke Rf Rm Rf 9 1417 9 9 014 8 9 112 1012 2 Cost of preference sha... View the full answer