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COST OF CAPITAL

Debt (kd)

Convertible debt:

• The cash flows discounted at 11.52%, i.e. the after tax rate of debt

because in the short-term, i.e. from year 0 to year 5 the cash flows are
debt (debentures).

• In the long-term, i.e. from the end of year 5 to infinity, the debentures

will be classified as equity (as they will convert). Hence the long-term
rate is 20% (ke).

• The debentures will be classified as equity with a required return of

20% in the WACC calculation (as this is a long term calculation).

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