Ayoba Limited uses a combination of shares and debt in their capital structure. There are 4...

 

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Ayoba Limited uses a combination of shares and debt in their capital structure. There are 4 million R1 ordinary shares in issue and the current market price is R4.20 per share. The latest dividend paid was 65 cents and a 11% average growth for the past six years was maintained. The company has 1 500 000 R2, 8% preference shares with a market price of R1.80 per share. The company has 1 500 000 R2, 8% preference shares with a market price of R1.80 per share. Ayoba Limited has a public traded debt with a face value of R3.2 million. The coupon rate of the debenture is 11% and the current yield to maturity of 14%. The debenture has 6 years to maturity. They also have a bank overdraft of R1.2 million due in 3 years' time and interest is charged at 15% per annum. Additional Information • Ayoba Limited has a beta of 2, a risk-free rate of 8% and a return on the market of 17%. • Company tax rate is 30%. Required 3.1 Calculate the weighted average cost of capital, using the Gordon Growth Model to calculate the cost of equity. (22) 1 3.2 Calculate the cost of equity, using the Capital Asset Pricing Model. (3) Ayoba Limited uses a combination of shares and debt in their capital structure. There are 4 million R1 ordinary shares in issue and the current market price is R4.20 per share. The latest dividend paid was 65 cents and a 11% average growth for the past six years was maintained. The company has 1 500 000 R2, 8% preference shares with a market price of R1.80 per share. The company has 1 500 000 R2, 8% preference shares with a market price of R1.80 per share. Ayoba Limited has a public traded debt with a face value of R3.2 million. The coupon rate of the debenture is 11% and the current yield to maturity of 14%. The debenture has 6 years to maturity. They also have a bank overdraft of R1.2 million due in 3 years' time and interest is charged at 15% per annum. Additional Information • Ayoba Limited has a beta of 2, a risk-free rate of 8% and a return on the market of 17%. • Company tax rate is 30%. Required 3.1 Calculate the weighted average cost of capital, using the Gordon Growth Model to calculate the cost of equity. (22) 1 3.2 Calculate the cost of equity, using the Capital Asset Pricing Model. (3)

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Answer 31 WORKING NOTES 1Calculation of cost of equity Cost of Equity Ke D1 V G D1 e... View the full answer