QUESTION 3 [20]

3.1 What value does the weighted average cost of capital (WACC) serve to decision makers? (4)

3.2 At a board meeting a director remarks "selling preference shares with a return of 9% or debentures with a return of 9% is really one and the same thing".

The company has the option of raising the R400 000 through either:

a. The sale of 40 000 preference shares at R10 per share or

b. 4000 debentures of R100 each.

NB:

the tax rate is 30% Do you agree with the director's assertion? Discuss with the aid of calculations. (9)

3.3 Mio Tinto Mining and Manufacturers shares have a beta of 1.40. At present government bonds/treasury bills present a return of 6% and the market return is 12%. Mio Tinto's dividend was R2.20 per share last year and they expect dividends to grow at 5%. Their shares sell for R30 per share at present (par value R20).

Calculate Mio Tinto's cost of equity using:

3.3.1 The Dividend Growth Model (3)

3.3.2 The Capital Asset Pricing Model (3)

3.3.3 Explain the reason/s for each method presenting different answers. (1)