QUESTION FOUR [25] You have been appointed as a financial consultant by the directors of Gumli Ltd. They require you to

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QUESTION FOUR [25]
You have been appointed as a financial consultant by the directors
of Gumli Ltd. 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 is 10%.
• R700 000, 14% Bank loan.
Additional information:
1. The company has a tax rate of 30%.
2. The beta of the company is 1.6, a risk free rate of 7% and
the return on the market is 15%.
Required:
Calculate the weighted average cost of capital. Use the Gordon
Growth Model to calculate the cost of equity.