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Discuss disadvantages of using the capital pricing model

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Reference no: EM132555918

Speedy Gonzales is a courier services company. The company needs to replace a few of its older vehicles to improve service delivery and reduce costs. As a financial consultant, you are appointed to calculate the cost of capital.

The following information is presented to you in respect to the company's capital structure:

1) 3 million R1 ordinary shares, currently trading at R4 per share

2) 2 million 12% R2 preference shares, currently trading at R3 per share

3) R1 million, 14% debentures, with a current yield-to-maturity of 11%, due in 6 years

4) Bank loan: R800 000 at 16% interest per annum, maturing in 7 years

Additional information:

The company has a beta factor of 1.5 and a risk free rate of 6%.

Its tax rate is 30% and the return on market is 15%.

The current dividend paid on the ordinary shares is 80 cents per share and a growth rate of 13% is maintained.

Required:

Question 1: Calculate the weighted average cost of capital.

(Use the Capital Asset Pricing Model to calculate the cost of equity.)

Question 2:  Discuss the advantages and disadvantages of using the Capital Pricing Model.

Reference no: EM132555918

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