SHOPITLtd, a locally registered companythatis listed on the Namibian Stock Exchange is considering expanding its current business activities and needs to calculate it’s Weighted Average Cost of Capital (WACC) to assess whether the expected return on its expansion plan will be sufficient to reward its debt and equity investors. The following information is available about the company and current market conditions in Namibia:

• 1 000 000 issued ordinary shares at a book value of N$10 per share
• 500 000 issued preference shares at book value of NS 1 per share and an annual return of 10%per share.
• The preference shares are currently trading at NS 0.87 per share.
• 10 000 issued bonds at a par/face value of NS 1 000 per bond,5 years to maturity, a coupon rate of 8% that pays interest twice-annually and SHOPIT’S bonds are currently trading at NS 960.44
• The current return on Namibian 3-month TreasuryBills is 6%
• The company’s equity beta is 1.3 and the current average required rate of return on the market for ordinary shares is 12%
• The corporate tax rate in Namibia is 32%
• A dividend of NS 0.75 has just been paid and dividends are expected to grow at a constant annual rate of 5%

Required
a) Using the Dividend Growth Model, calculate the current market value of SHOPIT’s ordinary shares.
(3 marks)
b) Using the Capital Asset Pricing Model (CAPM), calculate SHOPIT’s cost of equity. (3 marks)
c) Calculate SHOPIT’s cost of debt for its bonds. (4 marks)
d) What would happen to market value of a SHOPIT bondif the market interests would increase and
why? (3 marks)
e) Calculate the cost of preference shares of SHOPIT’s preference shares. (3 marks)
f) Using the information calculated above, calculate SHOPIT’s WACC (5 marks)
g) Compare (in theory) the cost of ordinary shares, preference shares and bonds. Which method of
finance should have the higher and lower cost? Explain your answer.