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Solve the cost of equity using the capital asset pricing

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Reference no: EM132999145

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

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

Required

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

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

Reference no: EM132999145

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