Let's break down the requirements for **QUESTION 3 – COST OF CAPITAL** step by step. --- ### **a. Calculate the weighted average cost of capital (WACC) for Munya Tsatsa Ltd** #### **Step 1: Calculate Cost of Each Component** #### **1. Ordinary Shares (Equity) – Use Gordon Growth Model (Dividend Growth Model)** \[ \text{Cost of Equity (}k_e\text{)} = \frac{D_1}{P_0} + g \] - \( D_1 \): Next year's expected dividend = \( 4 \times 1.2 = R4.80 \) - \( P_0 \): Current share price = R16 - \( g \): Dividend growth rate = 20% = 0.20 \[ k_e = \frac{4.80}{16} + 0.20 = 0.30 + 0.20 = 0.50 = 50\% \] --- #### **2. Preference Shares** \[ \text{Cost of Preference Shares (}k_{ps}\text{)} = \frac{D_{ps}}{P_{ps}} \] - Dividend = 20% of R4 = R0.80 per share (assuming 20% is on face value, but if it's 20% on market price, then R2) - Market price = R10 Assume it's 20% * R4 (as per usual preference share conventions): \[ k_{ps} = \frac{0.8}{10} = 0.08 = 8\% \] --- #### **3. Debentures (After-tax cost)** \[ \text{Cost of Debt (}k_d\text{)} = \text{Interest rate} \times (1 - \text{Tax rate}) \] - Interest rate = 20% - Tax rate = 30% \[ k_d = 0.20 \times (1 - 0.30) = 0.20 \times 0.70 = 0.14 = 14\% \] --- #### **4. Bank Loan (After-tax cost)** \[ \text{Cost of Loan} = 25\% \times (1 - 0.30) = 0.25 \times 0.70 = 0.175 = 17.5\% \] --- #### **Step 2: Calculate Proportions of Each Source (Market Value Weights)** | Source | Market Value | |---------------------|----------------------| | Ordinary shares | 1,500,000 × R16 = R24,000,000 | | Preference shares | 1,000,000 × R10 = R10,000,000 | | Debentures | R8,000,000 | | Bank Loan | R6,000,000 | | **Total** | R48,000,000 | #### **Step 3: Calculate Weights** - **Ordinary shares:** \( \frac{24,000,000}{48,000,000} = 0.50 \) or 50% - **Preference shares:** \( \frac{10,000,000}{48,000,000} \approx 0.21 \) or 20.83% - **Debentures:** \( \frac{8,000,000}{48,000,000} \approx 0.17 \) or 16.67% - **Bank Loan:** \( \frac{6,000,000}{48,000,000} \approx 0.125 \) or 12.5% --- #### **Step 4: WACC Calculation Table** | Component | Weight (W) | Cost (R) | Weighted Cost (W × R) | |--------------------|------------|----------|-----------------------| | Ordinary Shares | 0.50 | 50% | 0.50 × 0.50 = 0.25 | | Preference Shares | 0.21 | 8% | 0.21 × 0.08 ≈ 0.017 | | Debentures | 0.17 | 14% | 0.17 × 0.14 ≈ 0.024 | | Bank Loan | 0.125 | 17.5% | 0.125 × 0.175 ≈ 0.022 | | **Total** | 1.00 | | **0.313 ≈ 31.30%** | --- **Final WACC:** \[ \boxed{31.30\%} \] --- ### **b. Use the Capital Asset Pricing Model (CAPM) to calculate the cost of capital** \[ k_e = R_f + \beta (R_m - R_f) \] - \( R_f \): Risk-free rate = 15% - \( \beta \): Beta = 1.5 - \( R_m \): Market return = 30% \[ k_e = 0.15 + 1.5 \times (0.30 - 0.15) = 0.15 + 1.5 \times 0.15 = 0.15 + 0.225 = 0.375 = 37.5\% \] --- ## **Summary Table for WACC Calculation** | Component | Market Value | Weight (W) | Cost (R) | Weighted Cost (W × R) | |--------------------|--------------|------------|----------|-----------------------| | Ordinary Shares | 24,000,000 | 0.50 | 50% | 0.25 | | Preference Shares | 10,000,000 | 0.21 | 8% | 0.017 | | Debentures | 8,000,000 | 0.17 | 14% | 0.024 | | Bank Loan | 6,000,000 | 0.125 | 17.5% | 0.022 | | **Total** | 48,000,000 | 1.00 | | **0.313** | --- ## **Answers** **a. WACC = 31.30%** **b. CAPM Cost of Equity = 37.5%** Let me know if you need the workings in Excel format!

Certainly! Here's a clear, step-by-step breakdown of the calculations in table format for easy reference and use in Excel: --- ### **Part a: Calculation of WACC for Munya Tsatsa Ltd** | **Component** | **Market Value (R)** | **Weight (W)** | **Cost of Capital (R)** | **Weighted Cost (W × R)** | |---------------------------|---------------------------------|----------------|------------------------|---------------------------| | **Ordinary Shares** | 1,500,000 × 16 = 24,000,000 | 24,000,000 / 48,000,000 = **0.50** | 50% (from Gordon Growth Model) | 0.50 × 50% = **0.25** | | **Preference Shares** | 1,000,000 × 10 = 10,000,000 | 10,000,000 / 48,000,000 ≈ **0.2083** | 8% (assumed from dividend info) | 0.2083 × 8% ≈ **0.0167** | | **Debentures** | R8,000,000 | 8,000,000 / 48,000,000 ≈ **0.1667** | 14% (after tax) | 0.1667 × 14% ≈ **0.0233** | | **Bank Loan** | R6,000,000 | 6,000,000 / 48,000,000 ≈ **0.125** | 17.5% (after tax) | 0.125 × 17.5% ≈ **0.0219** | | **Total** | **-** | **1.00** | **-** | **Sum: 0.25 + 0.0167 + 0.0233 + 0.0219 ≈ 0.3119** | **Final WACC ≈ 31.19%** --- ### **Part b: CAPM-Based Cost of Equity** \[ k_e = R_f + \beta (R_m - R_f) \] \[ k_e = 15\% + 1.5 \times (30\% - 15\%) = 15\% + 1.5 \times 15\% = 15\% + 22.5\% = \boxed{37.5\%} \] --- ### **Summary:** | **WACC (from part a)** | **≈ 31.19%** | |------------------------|--------------| | **Cost of Equity (CAPM)** | **37.5%** | --- Feel free to input these values into Excel using the table format above for further analysis or reporting!