The management of Octopus Limited, a manufacturing entity, is considering a new investment opportunity that requires information
Question:
The management of Octopus Limited, a manufacturing entity, is considering a new investment opportunity that requires information about the current cost of capital of the company. The capital structure of Octopus Limited is as follows:
o 4 million ordinary shares with par value of 50 cents each, currently trading at R5.00 per share. The company has a beta (????) of 1.6, a risk free rate (????????) of 9% and a return on the market (????????) of 17%.
o 1.5 million 13%, R2 preference shares, with a market value of R3.50 per share.
o R3 million 11%, debentures due in 5 years with a current yield-to-maturity of 8%.
o R900 000 16%, Bank loan, due in December 2025.
Additional information:
Octopus Limited has maintained a dividend growth rate of 12% per annum over the past 5 years. The latest dividend paid was 100 cents per share.
The company's tax rate is 30%.
Required:
1.1. Calculate the weighted average cost of capital (WACC) of Octopus Limited. Use the Capital Asset Pricing Model to calculate the cost of equity. (12)
1.2. Calculate the weighted average cost of capital (WACC) of Octopus Limited. Use the Gordon Growth Model to calculate the cost of equity.