QUESTION $4$

$(20$ Marks$)$

REQUIRED

Use the information provided below to calculate the following $($expressed to two decimal places$)$:

$4\mathrm{.}1$

Cost of equity using the Capital Asset Pricing Model

$(4$ marks$)$

$4\mathrm{.}2$

Cost of equity using the Gordon Growth Model

$(4$ marks$)$

$4\mathrm{.}3$

Cost of preference shares

$(4$ marks$)$

$4\mathrm{.}4$

Cost of debt

$(4$ marks$)$

$4\mathrm{.}5$

Weighted average cost of capital.

$(4$ marks$)$

INFORMATION

Munster Limited intends raising finance for a new investment opportunity. The following information has been made available to determine the present cost of capital to the company:

The capital structure consists of the following:

$$

$3$ million ordinary shares issued at R$4$ each but currently trading for R$5$ each.

$$

$2$ million $12\%,$ R$2$ preference shares with a market value of R$2\mathrm{.}50$ per share.

$$

R$500000018\%$ bank loan, due in June $2029.$

Additional information

$$

The Gordon Growth Model is used to determine the cost of equity.

$$

A dividend growth of $12\%$ per annum on ordinary shares was maintained over the past four years.

$$

The last dividend paid was $50$ cents per share.

$$

The company$$s beta coefficient is $1\mathrm{.}2.$

$$

The risk$-$free rate is $10\%$ but the return on the market is $18\%.$

$$

The company tax rate is $27\%.$