QUESTION 4 [20]

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

4.2 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. 4 000 debentures of R100 each. NB: the tax rate is 30% Do you agree with the directors assertion? Discuss with aid of calculations.(9)

4.3 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 Tintos 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 Tintos cost of equity using

: 4.3.1 The Dividend Growth model. 4.3.2 The Capital Asset pricing model.

4.3.3 Explain the reason/s for each method presenting different answers. (7)