Required: 2.1 Calculate the weighted average cost of capital. Use the Gordon Growth Model to calculate the cost of equity 2.2 Calculate the cost of equity, using the Capital Asset Pricing Model.
Required: 2.1 Calculate the weighted average cost of capital. Use the Gordon Growth Model to calculate the cost of equity 2.2 Calculate the cost of equity, using the Capital Asset Pricing Model.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Question 2
You have been appointed as a financial consultant by the directors of Baron Holdings. They require you to determine the cost of
capital of the company.
The following information is available on the capital structure of the company:
ü 1 500 000 ordinary shares, with a market price of R3 per share. The latest dividend declared was 86 cents per share. A
dividend growth of 15% was maintained for the past 5 years.
ü 1 000 000 11%, R1 preference shares, with a market value of R3 per share.
ü R1 000 000 9%, debentures due in 7 years and the current yield-to-maturity is 10%. Note that the current price of the
debenture is R951 356
ü R700 000 14%, bank loan, due in December 2021.
Additional information:
- The company has a tax rate of 30%.
- The beta of the company is 1.7, a risk free rate of 5% and the return on the market is 14%.
Required:
2.1 Calculate the weighted average cost of capital. Use the Gordon Growth Model to calculate the cost of equity
2.2 Calculate the cost of equity, using the Capital Asset Pricing Model.
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