QUESTION 1
The Directors of Kudiwa Industries have appointed you as their financial consultant. They are seeking new project investments and require you to calculate the present cost of capital of the company.
The capital structure is listed below:
2 million ordinary shares with a par value of 50 cents each, currently trading at $4 per share. The company has a beta (β) of 1.3, the risk free (Rf) rate is 8% and the return on the market (Rm) is 18%.
1.5 million 13%, $2 preference shares, with a market value of $2.5 per share.
$3 million 11%, debentures due in 5 years and the current yield-to-maturity is 8%.
$800 000 16%, bank loan, due in December 2019.
Additional information:
The dividend growth of 12% per annum was maintained for the past 4 years.
The latest dividend paid was 80 cents per share.
Assume a company tax rate of 30%.
Required:
1.1 Calculate the weighted average cost of capital. Use the Capital Asset Pricing Model to calculate the cost of equity. (22 marks)
1.2 Calculate the cost of equity, using the Gordon Growth Model. (3 marks)