QUESTION TWO $[25]$

You have been appointed as a financial consultant by the directors of Iato Ltd$.$ They require you

to calculate the cost of capital of the company.

The following information is available on the capital structure of the company:

$1500000$ Ordinary shares, with a market price of R$3$ per share. The latest dividend

declared was $90$ cents per share. A dividend growth of $13\%$ was maintained for the past

$5$ years.

$100000012\%,$ R$1$ Preference shares with a market value of R$2$ per share.

$$ R$1000000$ Debentures due in $7$ years with a current market value of R $951356$ and a

before tax cost of $10\%.$

$$ R$700000(14\%)$ Bank loan.

Additional information:

$1.$ The company has a tax rate of $30\%.$

$2.$ The beta of the company is $1\mathrm{.}6,$ a risk free rate of $7\%$ and the return on the market is

$15\%.$

Required:

$2\mathrm{.}1$ Calculate the weighted average cost of capital $($WACC$).$ Use the Gorden Growth

Model to calculate the cost of equity. $(22)$

$2\mathrm{.}2$ Calculate the cost of equity, using the Capital Asset Pricing Model. $(3)$