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Calculate weighted average cost of capital

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Reference no: EM133234911

QUESTION 1.

1. Marine Limited normal credit terms to Aqua Stores are 90 days but is prepared to allow a 5% rebate if it pays the account within 30 days. Calculate the cost to Aqua Stores of not accepting the discount.

2. Differentiate in detail between accruals and bank overdraft.

QUESTION 2.

Star Traders uses a combination of shares and debt in their capital structure.

The details are given below:

There are 500 000 R0.50 ordinary shares in issue and the current market price is R1.50 per share. The latest dividend paid was 10 cents and a 9% average growth for the past six years was maintained.

The company has 250 000 R0.70, 8% preference shares with a market price of R1.60 per share.

Star Traders has a public traded debt with a face value of R700 000. The coupon rate of the debenture is 7% and the current yield to maturity of 15%. The debenture has 8 years to maturity.

They also have a bank overdraft of R100 000 due in 3 years' time and interest is charged at 14% per annum.

Additional Information:

- Star Traders has a beta of 1.5, a risk-free rate of 7.9% and a return on the market of 16.5%.

- Company tax rate is 30%.

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 cost of equity, using the Gordon Growth Model.

 

Reference no: EM133234911

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