Problem
The directors of Reboost Limited have appointed you as their financial consultant.
They are considering new investment projects and need you to calculate the cost of capital for the company.
The present capital structure is as follows:
• 10 000 000 ordinary shares with a par value of R3.75 per share.
• These shares are currently trading at R22.50 per share and the latest dividend paid is R1.50. An average dividend growth of 18% is maintained.
• 7 500 000, 16%, R15.00 preference shares, with a market value of R25.00 per share.
• R10 000 000 non-distributable reserves.
• R4 000 000 14% debentures due in 4 years' time and the current yield-to-maturity is 12%, and
• R4 500 000 11% bank loan.
• Additional information:
• The company has a beta of 1.9, a risk-free rate of 9% and the return of the market is 13%.
• The company's tax rate is 28%.
Task
A. Calculate the weighted average cost of capital, using the Capital Asset Pricing Model to calculate the cost of equity.
B. Calculate the adjusted weighted average cost of capital, using the Gordon Growth Model as the cost of equity.