The directors of Temu 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 and additional information for Temu Limited is as follows:• 3 000 000 ordinary shares with a par value of 85 cents per share. These shares are currently trading at R5.50 per share and the latest dividend paid is 40 cents. An average dividend growth of 14% is maintained.• 600 000 15% R4.00 preference shares, with a market value of R6.00 per share.•R6 000 000 non-distributable reserves• R2 200 000 8% debentures due in 6 years’ time and the current yield-to-maturity is 6%, and• R900 000 13% bank loan.• The company has a beta of 1.8, a risk-free rate of 6% and enjoys a market risk premium of 9%. Market risk premium is the additional return that investors expect to earn from a market portfolio compared to a risk-free investment. Therefore, it is the difference between the expected market return and the risk-free rate.• The company's tax rate is 30%. Required:2.1 Calculate the weighted average cost of capital, using the Capital Asset Pricing Model to calculate the cost of equity. 2.2 Calculate the weighted average cost of capital, using the Gordon Growth Model to calculate the cost of equity.
The directors of Temu 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 and additional information for Temu Limited is as follows:
• 3 000 000 ordinary shares with a par value of 85 cents per share. These shares are currently trading at R5.50 per share and the latest dividend paid is 40 cents. An average dividend growth of 14% is maintained.
• 600 000 15% R4.00
•
R6 000 000 non-distributable reserves
• R2 200 000 8% debentures due in 6 years’ time and the current yield-to-maturity is 6%, and
• R900 000 13% bank loan.
• The company has a beta of 1.8, a risk-free rate of 6% and enjoys a market risk premium of 9%. Market risk premium is the additional return that investors expect to earn from a market portfolio compared to a risk-free investment. Therefore, it is the difference between the expected market return and the risk-free rate.
• The company's tax rate is 30%.
Required:
2.1 Calculate the weighted average cost of capital, using the
2.2 Calculate the weighted average cost of capital, using the
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