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QUESTION $1$

$[15$ MARKS$]$

The management of Octopus Limited, a manufacturing entity, is considering a new investment opportunity that requires

information about the current cost of capital of the company. The capital structure of Octopus Limited is as follows:

$4$ million ordinary shares with par value of $50$ cents each, currently trading at R$5\mathrm{.}00$ per share. The company has

a beta $()$ of $1\mathrm{.}6,$ a risk free rate $(R_f)$ of $9\%$ and a return on the market $(R_m)$ of $17\%.$

$1\mathrm{.}5$ million $13\%,$ R$2$ preference shares, with a market value of R $3\mathrm{.}50$ per share.

R$3$ million $11\%,$ debentures due in $5$ years with a current yield$-$to$-$maturity of $8\%.$

R$90000016\%,$ Bank loan, due in December $2025.$

Additional information:

Octopus Limited has maintained a dividend growth rate of $12\%$ per annum over the past $5$ years. The latest

dividend paid was $100$ cents per share.

The company's tax rate is $30\%.$

Required:

$1\mathrm{.}1.$ Calculate the weighted average cost of capital $($WACC$)$ of Octopus Limited. Use the Capital Asset Pricing Model

to calculate the cost of equity.

$1\mathrm{.}2.$ Calculate the weighted average cost of capital $($WACC$)$ of Octopus Limited. Use the Gordon Growth Model to

calculate the cost of equity.