Rio Tinto is a leading global mining group that focuses on finding, mining and processing the Earth’s mineral resources. The company has grown through a long series of mergers and acquisitions to place itself among the world leaders in the production of many commodities, including aluminium, iron ore, copper, uranium, coal, and diamonds. Although primarily focused on extraction of minerals, Rio Tinto also has significant operations in refining, particularly for refining bauxite and iron ore. Rio Tinto has an equity beta of 1.10; the market risk premium in Namibia is expected to be 5% and the yield on the Namibian government bonds has been and remains at 7.5%. The company has issued N$10 Million

worth of NSlOO par value bonds to finance an excavation project for new minerals. The

bonds whose coupon rate is 8% are currently giving a yield to maturity of 12% and they are redeemable in five years. The tax rate is 28%; interest on the bonds is paid annually in arrears and the companyjust paid the coupon for the current year. Recently, Rio Tinto paid a dividend of N$0.12 per share which is expected to grow at 7% indefinitely. The company’s

share price is N$2.30

**Required:**

a) What is the company’s cost of equity based on the Capital Asset Pricing Model

(CAPM)? (3 marks)

b) What is the market value of the bond? (5 marks)

c) What is the after tax cost of debt? (3 marks)

d) What is the company’s cost of equity using the Dividend Growth Model? (5 marks)

e) Using the cost of equity as per CAPM, determine the Weighted Average Cost of

Capital if the debt- ratio is 30% (3 marks)

f) Identify and describe any three limitations of the Dividend Growth Model (6 marks)