Reference no: EM132977952

Question - You have been appointed as a financial consultant by the directors of Elsa Holdings. They require you to calculate the cost of capital of the company. The following information is available on the capital structure of the company:

1,500,000 - Ordinary shares, with a market price of R3 per share. The latest dividend declared was 90 cents per share. A dividend growth of 13% was maintained for the past 5 years.

1,000,000 - 12%, R1 Preference shares with a market value of R2 per share.

R1,000,000 - 9%, Debentures due in 7 years and the current yield-to-maturity (ytm) is 10%.

R250,000 - 14%, Bank loan.

Additional information:

1. The company has a tax rate of 30%.

2. The beta of the company is 1.4, a risk free rate of 9% and the return on the market is 18%.

3. Debentures are discounted at 4.8684 based on 10% ytm.

Required -

1. Calculate the weighted average cost of capital (WACC). Use the Gordon Growth Model to calculate the cost of equity.

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