Question $3$

$(25$ Marks$)$

You have been appointed as a financial consultant by the directors of Riyadh Holdings. They require you to calculate the cost of capital of the company.

The following information is available on the capital structure of the company:

$1500000$ Ordinary shares, with a market price of R$3$ per share. The latest dividend declared was $95$ cents per share. A dividend growth of $10\%$ was maintained for the past $5$ years.

$100000012\%,$ R$1$ Preference shares with a market value of R$2$ per share.

R$10000009\%,$ Debentures due in $7$ years and the current yield$-$to$-$maturity is $10\%.$

R$80000014\%$ Bank loan, due in December $2017.$

Additional information:

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

The beta of the company is $1\mathrm{.}6,$ a risk$-$free rate of $6\%$ and the return on the market is $15\%.$

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 Gordon Growth Model to calculate the

$(22$ marks$)$

cost of equity.

$3\mathrm{.}2$ Calculate the cost of equity, using the Capital Asset Pricing Model.

$(3$ marks$)$