Calculate the weighted average cost of capital

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Reference no: EM133019156

Ayoba Limited uses a combination of shares and debt in their capital structure. There are 4 million R1 ordinary shares in issue and the current market price is R4.20 per share. The latest dividend paid was 65 cents and a 11% average growth for the past six years was maintained. The company has 1 500 000 R2, 8% preference shares with a market price of R1.80 per share. The company has 1 500 000 R2, 8% preference shares with a market price of R1.80 per share. Ayoba Limited has a public traded debt with a face value of R3.2 million. The coupon rate of the debenture is 11% and the current yield to maturity of 14%. The debenture has 6 years to maturity. They also have a bank overdraft of R1.2 million due in 3 years' time and interest is charged at 15% per annum.

Additional Information

  • Ayoba Limited has a beta of 2, a risk-free rate of 8% and a return on the market of 17%.
  • Company tax rate is 30%.

Required

1. Calculate the weighted average cost of capital, using the Gordon Growth Model to calculate the cost of equity.

2. Calculate the cost of equity, using the Capital Asset Pricing Model.

Reference no: EM133019156

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