Question 2You have been appointed as a financial consultant by the directors of Baron Holdings. They require you to determine the cost ofcapital 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. Adividend 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 thedebenture is R951 356ü 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 equity2.2 Calculate the cost of equity, using the Capital Asset Pricing Model.

WACC stands for Weighted Average Cost of Capital. It's a calculation used to assess the average cost…

Answered: Required: 2.1 Calculate the weighted…

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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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.