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Zeel Company has 100 000 bonds outstanding that are selling at R1000. Bonds with similar characteristics are yielding 7.5%. The company has 1 million shares of preferred stock outstanding and 5 million shares of common stock outstanding. The preferred stock sells for R50 per share and R5 dividends. The common stock has a beta of 1.2 and sells for R36 which just paid a R3 dividend a share. Market analysts foresee growth in common stock dividends at a rate of 5% per year. The risk free rate in the market is 3% and the return on the market is 12%. The company's marginal tax is 35%.
Question a. Calculate Zeel's weighted average cost of capital using the CAPM model
Question b. Calculate Zeel's weighted average cost of capital using dividend discount model
Question c. Which estimate would you recommend for Zeel and why
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