2 MBA5903 OCTOBER/NOVEMBER 2018 [8 Marks] Question 1 Consider an investment with the following year-end cash flows End of Year Cash Flow 1 R20 2 R30 3 R15 Required: Using a 15 percent interest rate, convert this senes of irregular cash flows to an equivalent (in present value terms) 3-year annuity Question 2 [8 Marks] Exxon Mobile expects its earnings and dividends to increase by 7 percent per year over the next 6 years and then to remain constant thereafter The Company currently pays dividends of R5 per share Required: Determine the value of a share of Exxon Mobile to an investor with a 12 percent required rate of return Question 3 [15 Marks] T-Systems is evaluating the purchase of a new computer system (ICX) for R130,000 The system will require additional R30,000 for installation If the new computer is purchased it will replace an old system that has been fully depreciated The new system will be depreciated over a period of 10 years using straight-line depreciation If the ICX is purchased, the old system will be sold for R20,000 The ICX system, which has a useful life of 10 years, is expected to increase revenues by R32,000 per year over its useful life Operating costs are expected to decrease by R2,000 per year over the life of the system The company is taxed at a 40 percent marginal tax Required: 31 Determine the net investment required to acquire the ICX system and replace the old system (5) 32 Calculate the annual net cash flows associated with the purchase of the ICX system [10] [TURN OVER] MBA5903 OCTOBER/NOVEMBER 2018 Question 4 [14 Marks] Consider the following information for two mutually exclusive projects undertaken by Lovers Food Market Annual Cash Flows 14 assignmeldag 2 -22 Year A B 0 -R60 000 A 3yrs 1 20 000 -R30 000 10 000 10 000 10 000 2 20 000 3 20 000 B 391 4 10 000 20 000 5 10 000 20 000 Lovers requires a 14 percent rate of return on projects of this nature Required: 41 42 Calculate the NPV of both projects Calculate the profitability index of both projects Calculate the payback period on both projects/ Which of the two projects, of either, should Lovers accepts and why? sell [4] [4] [4] [2] 43 4 4 Question 5 116 Marks] Thermal Corporation is evaluating two projects for the replacement of its old cooling unrt The existing unit has recently stopped working and has no salvage value of the two competing cooling units, B has a long life but a higher initial cost than the cheaper unt A. The following data are available for evaluation Net Cash Flow Year B 0 -R50 000 -R79 000 1 25 000 28 000 2 25 000 28 000 3 25 000 28 000 4 28 000 5 28 000 The marginal costs of capital is 19 percent [TURN OVER] MBA5903 OCTOBER NOVEMBER 2018 au mond 228C81) Required: 51. If the projects cannot be repeated, which cooling unit should be purchased it Thermal uses NPV as its criterion for project selection? [6] Assume that the projects can be repeated and that there are no anticipated changes in the cash flows. Using the equivalent annual annuity (EAA) method, what is the EAA and NPV of the two projects? [8] Which project should be selected and why? EAA= C = Crx na ley 1-0 +75) MPV v/s Art Question 6 (12 Marks] Your company is evaluating two indepent investments with the following cash flow streams Net Cash Flow : Year A B 0 -R50 000 -R40 000 1 20 000 20 000 2 20 000 10 000 3 10 000 5 000 4 5 000 5 000 APU=APU r-intort fats 5 5 000 40 000 Your company uses a combination of the net present value approach and the payback approach to evaluate investment alternatives. It requires that all projects have a positive net present value when cash flows are discounted at 10 percent and that all projects have a payback no longer than three years Required: Which project or projects should the company accept and why? NPV) Ass 228(8.1) PB A 34 B 448 [12 Marks] Question 7 Titanium Minerals has an estimated beta of 1.6. The company is evaluating the acquisition of another company that has a beta of 1.2 Both companies are exactly the same size. Required: 7.1. What is the expected new beta value for the combined company? [2] 72. The risk-free rate of return is estimated at 7 percent and the market retum is estimated as 12 percent. What is your estimate of the required rate of retum of investment in Titanium before and after the merger? ITURN OVER] 5 MBA5903 OCTOBER NOVEMBER 2018 Titanium Minerals is expected to pay a R1 dividend next year (D1 = R1) This dividend is expected to grow at a rate of 6 percent per year for the foreseeable future of the merger is not completed The merger is not expected to change the current dividend rate, but future dividends are expected to grow at a 7 percent rate as a result of the merger 7.3. [2] [2] [2] What is the value of a share in Titanium Minerals prior to the merger? What is the new value of a share, assuming that the merger is completed? Would you recommend that Titanium go ahead with the merger? 74 7.5 Question 8 (15 Marks] Sibanye Gold Company has estimated the cost of debt and equity capital (with bankruptcy and agency costs) for various proportions of debt in its capital structure. Debt Ratio (B/(B+E)] 0.00 Cost of Equity (ke) (b) 130 Weighted Average cost of Capital 12% 11 68 Pretax Cost of Debt (kd) (a) (c) v 8.0 (e) 140 015 030 045 0 145 165 190 11.775 12.64 Required: 81. 82 Fill in the missing entries in the table. [12] Determine the capital structure (that is debt ratio) that minimizes the company's weighted average cost of capital [3] 908X91145 1.164: EXTERNAL EXAMINER: PROF C CHIPETA 2x 9,13 = 0,1168 x = 0,1168 PARA as 8.9816) UNISA 2018 @ 0=0,11775 0,165 x=87 1.36% C@