Question $1$

$[30$ MARKS$]$

You have been appointed as a financial consultant by the directors of Biz Tech Holdings. They require you to calculate the cost of capital of the company and advise them accordingly. They intend to raise $1\mathrm{.}2$ 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, Biz Tech 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:

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

The beta of the company is $1\mathrm{.}8,$ a risk$-$free rate of $6\%$ and the return on the market is $22\%.$ The latest dividend declared was $90$ cents per share. A dividend growth of $8\%$ was maintained for the past $5$ years.

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

Required:

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

$1\mathrm{.}2$ 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.

$1\mathrm{.}3$ Biz Tech Holdings aims to improve its cash flow position in order to become a cash$-$rich business entity. Suggest ways that the company can employ to seek the best return with the least risk involved.

$(7)$Management accounting