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Calculate Huldi cost of equity

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Reference no: EM133015806

Question - At a Finance Committee meeting a director remarks "Selling preference shares with a return of 9 % or debentures with a return of 9 % is really one and the same thing". The company has the option of raising R400 000 through either:

a. The sale of 40 000 preference shares at R10 per share or

b. 4 000 debentures of R100 each.

NB: the tax rate is 30%

Evaluate the director's assertion with the aid of appropriate calculations.

Huldi Manufacturers shares have a beta of 1,40. At present government bonds/treasury bills present a return of 6% and the market return is 12 %. Huldi's dividend was R2,20 per share last year and they expect dividends to grow at 5%.

Their shares sell for R30 per share at present (par value R20).

Calculate Huldi's cost of equity using:

The Dividend Growth Model

The Capital Assets Pricing Model

Analyse the reasons for each method presenting different answers.

Outline the disadvantages of the Capital Asset Pricing Model (CAPM).

Reference no: EM133015806

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