Question $2$

$(25$ Marks$)$

The directors $of$ Pav Limited have appointed you $as$ their financial consultant. They are considering new investment projects and need you $to$ calculate the cost $of$ capital for the company.

The present capital structure $isas$ follows: $-$

$*$

$3450000$ ordinary shares with a par value $of75$ cents per share. These shares are currently trading $atR4\mathrm{.}50$ per share and the latest dividend paid $is30$ cents. $An$ average dividend growth $of13\%is$ maintained.

$*$

$50000014\%R3\mathrm{.}00$ preference shares, with a market value $ofR5\mathrm{.}00$ per share.

$*$

$R5000000$ non$-$distributable reserves.

$*$

$R60000008\%$ debentures due $in6$ years$$ time and the current yield$-to-$maturity $is6\%,$ and;

$*$

$R80000013\%$ bank loan.

Additional information:

$$

The company has a beta $of1\mathrm{.}5,$ a risk$-$free rate $of6\%$ and enjoys a premium $of7\%.$

$$

The company's tax rate $is30\%.$

Required:

$2\mathrm{.}1.$ Calculate the weighted average cost $of$ capital, using the Gordon Growth Model $to$ calculate the cost $of$ equity

$(20$ Marks$)$

$2\mathrm{.}2.$ Calculate the adjusted weighted average cost $of$ capital, using the Capital Asset Pricing Model $as$ the cost $of$ equity

$(5$ Marks$)$