QUESTION TWO $(25$ Marks$)$

Fendi Traders uses a combination of shares and debt in their capital structure.

The details are given below:

$$ There are $2$ million R$1\mathrm{.}80$ ordinary shares in issue and the current market price is R$3\mathrm{.}50$ per share. The latest dividend paid was $50$ cents and a $9\%$ average growth for the past six years was

maintained.

$$ The company has $1500000$ R$3,9\%$ preference shares with a market price of R$2\mathrm{.}80$ per share.

$$ Fendi Traders has a public traded debt with a face value of R$8000000.$ The coupon rate of the debenture is $7\%$ and the current yield to maturity of $15\%.$ The debenture has $8$ years to maturity.

$$ They also have a bank overdraft of R$4000000$ due in $3$ years$$ time and interest is charged at $15\%$ per annum.

Additional Information:

$$ Fendi Traders has a beta of $1\mathrm{.}3,$ a risk$-$free rate of $6\mathrm{.}2\%$ and a return on the market of $14\mathrm{.}5\%.$

$$ Company tax rate is $28\%.$

Required:

$2\mathrm{.}1$ Calculate the weighted average cost of capital, using the Capital Asset Pricing Model to calculate the cost of

equity. $(20)$

$2\mathrm{.}2$ Calculate the cost of equity, using the Gordon Growth Model. $(5$