ANSWER ALL QUESTIONS (100)

QUESTION 1 (25)

Mia Carriers has determined that a new specialised delivery truck needs to be purchased. The truck will generate a positive net present value NPV of R480 000, calculated using the company’s WACC of 20%. The truck can be leased from the manufacturer. The lease agreement requires 5 annual payments of R800 000, with the first payment due on the delivery of the vehicle. The truck can also be purchased at a cost of R4 million, inclusive of a 4-year maintenance contract with the manufacturer. The R4 million will be paid upon delivery as the company has enough reserves to cover the cost of truck in cash. The truck can be depreciated at 25% per annum using the reducing balance method and will be sold at book value at the end of 4 years. Assume a current corporate tax rate of 30% and a pre- tax cost of debt of 20%.

Required:

1.1 Determine the after-tax cash flows and the net present value of the cash outflows under each alternative. (23)

1.2 Briefly indicate which alternative should be recommended. (2)

QUESTION 2 (25) SHARE PERCENTAGE OF PORTFOLIO BETA EXPECTED RETURN (%)

ABSA 40 1.00 12

FNB 25 0.75 11

CAPITEC 35 1.30 15

Required:

2.1 Determine the expected return of the entire portfolio that are listed above (5)

2.2 Determine the beta of the entire portfolio listed above (5)

2.3 Given the information provided above, you are required to determine whether the three banks are overpriced, fairly or overpaid based on the information provided. Assume the risk- free rate is 8% and that the expected return on the market portfolio is 12%. (15)

QUESTION 3 (25)

Ayoba Limited uses a combination of shares and debt in their capital structure. There are 4 million R1 ordinary shares in issue and the current market price is R4.20 per share. The latest dividend paid was 65 cents and a 11% average growth for the past six years was maintained. The company has 1 500 000 R2, 8% preference shares with a market price of R1.80 per share. The company has 1 500 000 R2, 8% preference shares with a market price of R1.80 per share. Ayoba Limited has a public traded debt with a face value of R3.2 million. The coupon rate of the debenture is 11% and the current yield to maturity of 14%. The debenture has 6 years to maturity. They also have a bank overdraft of R1.2 million due in 3 years’ time and interest is charged at 15% per annum.

Additional Information

• Ayoba Limited has a beta of 2, a risk-free rate of 8% and a return on the market of 17%.

• Company tax rate is 30%.

Required

3.1 Calculate the weighted average cost of capital, using the Gordon Growth Model to calculate the cost of equity. (22)

3.2 Calculate the cost of equity, using the Capital Asset Pricing Model. (3)

QUESTION 4 (25)

Nexcare (Ltd) operate a number of car washes and auto valet services. The company has experienced a reasonable trading year. They are deciding whether to pay out R248 000 in accumulated cash in the form of dividend to shareholders or embark on a share repurchase campaign. Current earnings are R7,20 per share and the share sells for R80.

Their abbreviated balance sheet before paying out the dividend is as follows:

Assets Equity and Liabilities

Tangible assets 400 000 Equity 620 000

Inventories 40 000 Debt 180 000

Receivables 60 000

Bank/cash 300 000

Total 800 000 Total 800 000

Required:

4.1. Calculate the number of shares in issue if the company where to pay the dividend. (2)

4.2. Calculate the number of shares in issue if the company were to repurchase its shares (3)

4.3. Spanking clean (Ltd) is deciding whether to pay out cash dividend or not. Discuss the option of dividend reinvestment plans and outline the benefits to the company and its shareholders. (6)

4.4. Calculate the dividends per share (for the first alternative, i.e. pay the dividend) (2)

4.5. Determine the net asset value of the firm should the company not exercise the option to repurchase its shares. (2)

4.6. Determine the new share price, EPS and price earnings ratio under both alternatives ( ie. Pay the dividend or repurchase the shares) (10)

79

MANCOSA: MBA (GENERAL) STAGE 1

PROGRAMME HANDBOOK: JANUARY 2021 INTAKE

80

80

Assessment Format

• Word limit: Approximately 6000 words

• Your assignment should include a Table of Contents page.

• Text: Font: Arial or Times New Roman (12), Spacing: 1.5 lines

• All text must be justified at each margin.

• The length of your answers to each question should be in line with the mark allocation. Your answers must include any theories, charts, tables or exhibits necessary to support your analysis and recommendations. Additional research should be consulted, when answering the assignment questions.

• Ensure that the readings are not merely reproduced in the assignment without original critical comments and views. Cohesive and logical arguments reflecting original thinking is encouraged.

• You MUST use theory/literature to support your discussion/observation and opinions. Do not merely extract information from the Case Study.

• References - At least 15 academic sources of reference must be used. (These include textbooks, journal articles and internet sources that are relevant to your field of study. Academic sources do not include Wikipedia and blogs). The MANCOSA study guide must not be used as a source of reference. You must include Reference list at the end of your assignment. Information quoted/paraphrased from sources listed in your Reference list must be referenced in-text. The Harvard system of referencing must be used.

• It is imperative that students proof read and edit their assignments prior to submitting them.

Assignments must be free from errors and of a professional standard.

QUESTION 1 (25)

Mia Carriers has determined that a new specialised delivery truck needs to be purchased. The truck will generate a positive net present value NPV of R480 000, calculated using the company’s WACC of 20%. The truck can be leased from the manufacturer. The lease agreement requires 5 annual payments of R800 000, with the first payment due on the delivery of the vehicle. The truck can also be purchased at a cost of R4 million, inclusive of a 4-year maintenance contract with the manufacturer. The R4 million will be paid upon delivery as the company has enough reserves to cover the cost of truck in cash. The truck can be depreciated at 25% per annum using the reducing balance method and will be sold at book value at the end of 4 years. Assume a current corporate tax rate of 30% and a pre- tax cost of debt of 20%.

Required:

1.1 Determine the after-tax cash flows and the net present value of the cash outflows under each alternative. (23)

1.2 Briefly indicate which alternative should be recommended. (2)

QUESTION 2 (25) SHARE PERCENTAGE OF PORTFOLIO BETA EXPECTED RETURN (%)

ABSA 40 1.00 12

FNB 25 0.75 11

CAPITEC 35 1.30 15

Required:

2.1 Determine the expected return of the entire portfolio that are listed above (5)

2.2 Determine the beta of the entire portfolio listed above (5)

2.3 Given the information provided above, you are required to determine whether the three banks are overpriced, fairly or overpaid based on the information provided. Assume the risk- free rate is 8% and that the expected return on the market portfolio is 12%. (15)

QUESTION 3 (25)

Ayoba Limited uses a combination of shares and debt in their capital structure. There are 4 million R1 ordinary shares in issue and the current market price is R4.20 per share. The latest dividend paid was 65 cents and a 11% average growth for the past six years was maintained. The company has 1 500 000 R2, 8% preference shares with a market price of R1.80 per share. The company has 1 500 000 R2, 8% preference shares with a market price of R1.80 per share. Ayoba Limited has a public traded debt with a face value of R3.2 million. The coupon rate of the debenture is 11% and the current yield to maturity of 14%. The debenture has 6 years to maturity. They also have a bank overdraft of R1.2 million due in 3 years’ time and interest is charged at 15% per annum.

Additional Information

• Ayoba Limited has a beta of 2, a risk-free rate of 8% and a return on the market of 17%.

• Company tax rate is 30%.

Required

3.1 Calculate the weighted average cost of capital, using the Gordon Growth Model to calculate the cost of equity. (22)

3.2 Calculate the cost of equity, using the Capital Asset Pricing Model. (3)

QUESTION 4 (25)

Nexcare (Ltd) operate a number of car washes and auto valet services. The company has experienced a reasonable trading year. They are deciding whether to pay out R248 000 in accumulated cash in the form of dividend to shareholders or embark on a share repurchase campaign. Current earnings are R7,20 per share and the share sells for R80.

Their abbreviated balance sheet before paying out the dividend is as follows:

Assets Equity and Liabilities

Tangible assets 400 000 Equity 620 000

Inventories 40 000 Debt 180 000

Receivables 60 000

Bank/cash 300 000

Total 800 000 Total 800 000

Required:

4.1. Calculate the number of shares in issue if the company where to pay the dividend. (2)

4.2. Calculate the number of shares in issue if the company were to repurchase its shares (3)

4.3. Spanking clean (Ltd) is deciding whether to pay out cash dividend or not. Discuss the option of dividend reinvestment plans and outline the benefits to the company and its shareholders. (6)

4.4. Calculate the dividends per share (for the first alternative, i.e. pay the dividend) (2)

4.5. Determine the net asset value of the firm should the company not exercise the option to repurchase its shares. (2)

4.6. Determine the new share price, EPS and price earnings ratio under both alternatives ( ie. Pay the dividend or repurchase the shares) (10)

79

MANCOSA: MBA (GENERAL) STAGE 1

PROGRAMME HANDBOOK: JANUARY 2021 INTAKE

80

80

Assessment Format

• Word limit: Approximately 6000 words

• Your assignment should include a Table of Contents page.

• Text: Font: Arial or Times New Roman (12), Spacing: 1.5 lines

• All text must be justified at each margin.

• The length of your answers to each question should be in line with the mark allocation. Your answers must include any theories, charts, tables or exhibits necessary to support your analysis and recommendations. Additional research should be consulted, when answering the assignment questions.

• Ensure that the readings are not merely reproduced in the assignment without original critical comments and views. Cohesive and logical arguments reflecting original thinking is encouraged.

• You MUST use theory/literature to support your discussion/observation and opinions. Do not merely extract information from the Case Study.

• References - At least 15 academic sources of reference must be used. (These include textbooks, journal articles and internet sources that are relevant to your field of study. Academic sources do not include Wikipedia and blogs). The MANCOSA study guide must not be used as a source of reference. You must include Reference list at the end of your assignment. Information quoted/paraphrased from sources listed in your Reference list must be referenced in-text. The Harvard system of referencing must be used.

• It is imperative that students proof read and edit their assignments prior to submitting them.

Assignments must be free from errors and of a professional standard.

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