financial management

SECTION A [100 MARKS] Answer ALL the questions in this section. QUESTION ONE You have been appointed as a financial consulant by the diectors of Menz Limited. They require you to determine the cost of capital of the company. The following information is available on the capital structure of the company- 1000 ordinary shares, with a market price of R40 per share. The latest dividend declared was R5 per share. A dividend growth of 12% was maintained for the past 5 years. Cash reserves equal to R100 000. 50013%, R30 preference shares, with a market value of R32 per share. R20 00010%, debentures due in 5 years and the cument yeld-to-maturity is 11%. R12 000 15\%, bank loan, due in Decenber 2026 Addibonal information: The company has a tax rate of 28%. The beta of the company is 1.2, a risk tree rate of 7% and the retum on the market is 12%. 1.1 Calculate the weighted average cost of capital. Use the Gordon Growth Model to calculate the cost (22 marks) of equity. 1.2 Calculate the cost of equily, using the Capital Asset Priong Model. (3 marks) QUESTION TWO Pinky Retailers is a dairy company which is in the process of negotiating the acquisition of Brain Wholesalers. The management estimates that the acquisition will result in economies of scale and the additional benefits will amount to R36 000000 . Pinky Retaiers is prepared to make a cash paymert of R178 000000 for Brain Wholesalers. The following information is available for the two comparies: Zayn Transporters has determined that a new specialised delivery truck needs to be purchased. The truck will generate a positive net present value NPV of R780 000, calculated using the company's WACC of 19%. The truck can be ieased from the manufacturet. The lease agreement requires 5 annual end of year payments of R280 500 with annual maintenance cost amounting to R40 000 . Altematively, the truck can be purchased at a cost of R1.25 milion, inclusive of a 5-year maintenance contract with the manufacturer. The truck can be depreciated straight-line over the same period and will have a zero-market value at the end of 5 years. Insurance costs are expected to be R2 000 per month over the 5 years. You may assume that the current corporate tax rate is 28% and the after-tax cost of debt is 13%. Sherwood Limited is an American based manufacturer of heavy-duty equipment. The company is currently investigating two projects for expansion. It can only undertake one of them and has asked your advice in deciding which one to proceed with. Project Bella: Production at the existing factory could be expansed. The cost of the new plant for tris option would be an initial outlay of $121000000. This would resul in an additional $12200000 profit being earned in each of the 6 years that the project would last. The new plant to be fully depreciated over the 6 years, on a straight-line basis, in accordance with the company's accounting policy. The financial team has also determined that the new plant must bear its share of the exising ovetheads and that amounted to $320000 per annum. These expenses were also induded in the profit calculation. Consultant fees cost $10000. Project Bow; Production could be increased by purchasing a new manufacturing facility in Souat Africa. The cost of the facility would be an initial outlay of R320 000000 . Annual sales for the 6-year period are expected to be R92 000000 , and fixed and variable cost of R13 million and R3 million respectively. Depreciation is calculated using the straight-line method. Consutants' fees are expected to be R1 250000. Additional information: -The South African infation is expected ts exceed the American irflation by 2% throughout the life of the project. "Sherwood Limited's cost of capital is curtently 9%. "The curent spot exchange rate is R16.445. 4.1 Advise Shenwood Limiled which project they should undertake, showing your caiculations and (22 marks) assumptions to support your advice 4.2. Advise Sherwood Limited it it is worth irvesting in nether, in one or in both of these projects