Tswinga Ltd and Muledane Ltd are two businesses operating in different industries from one another. They are both financed by a mixture of ordinary share and loan capital and both are seeking to derive the cost of capital for investment decision making purposes. The following information is available concerning the two businesses for the year ended 31 March 2015.

                                                                                    Tswinga Ltd                        Muledane Ltd

Profit for the year                                                       R3 million                R4 million

Gross dividends                                                          R1.5 million            R2 million

Market value per ordinary share                                R4                          R1.60

Number of ordinary shares                                                   5 million                  10 million

Gross interest yield on loan capital (YTM)                  8%                           12%

Market value of loan                                                R10 million               R16 million

The annual growth rate in dividends is 5% for Tswinga Ltd and 8% for Muledane Ltd. Corporate tax rate is 28%.

Required:

a) Calculate the market value weighted average cost of capital (WACC) of Tswinga Ltd and of Muledane Ltd.

b) Discuss two possible reasons why the cost of ordinary share capital differs between the two businesses.

c) Discuss two limitations of using the WACC when making investment decisions.