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FIN4801 2016 APPENDIX A: ASSIGNMENTS FOR 2016 Note: All calculations must be shown clearly ASSIGNMENT 01 UNIQUE NUMBER: 891054 [50marks] Due date: 20 MAY 2016 QUESTION 1 [25 marks] Xelo Ltd, whose current sales consist of fixed operating costs of R140 000 and variable operating costs equal to 22% of sales, has made the following two sales estimates with their noted probabilities. Sales R450 000 R710 000 Probabilities 0.35 0.65 Xelo Ltd is currently 100% equity financed with a total market value of R450 000, consisting of ordinary shares trading at R5 each. Xelo Ltd pays all its net income as dividends and is in a 15% tax bracket. The firm is considering using one of the following capital structures: Debt ratio 30% 45% Before-tax cost of debt (k d ) 4% 7% Required 17% 20% REQUIRED (a) (b) (c) (d) (e) Calculate the debt, equity and number of shares under each of the capital structures under consideration. [5] Calculate expected earnings per share (E/EPS) for the proposed capital structures. [7] Use the valuation model to estimate share value of both capital structures. [4] Based on the long-term and short-term goals of financial management, which capital structure would you recommend? [4] Based on the long-term goal, at what overall capitalisation rate would you capitalise the company and why? [5] 1 FIN4801 2016 QUESTION 2 [25marks] ABC Ltd is attempting to project its financial requirements for the next 10-year period. The company is a relative newcomer to the industry, having been in the business for only three years. Initially the company was totally unknown and found financing, particularly of a permanent nature, quite difficult to obtain. As a result, the company was literally forced to structure its sources of financing as follows: Trade credit payable Short-term borrowing Ordinary shares R200 000 R240 000 R440 000 R880 000 In the three years the company has been very successful, increasing its total capitalisation by R120 000 as a result of retained earnings. It is now in a position where it could obtain a long-term loan for ten years from a financing house at a rate of 10%, in place of all or any of its present short-term borrowings. Alternatively, it could renew its existing R240 000, or any part thereof, with a one year loan from the bank at a rate of 8%. The company has a tax rate of 32%. The company's financial director is considering three possible financing plans: 1. Renew the one-year loan with the bank 2. Borrow R240 000 from a financing house 3. Borrow R120 000 from each of the 2 above alternatives The financial director has estimated short-term riskless rates, the premiums that the company may have to pay over the riskless rate for the three possible states of the economy, and the probability of each. The average rates that the company would be likely to pay over the next ten years on its short-term borrowings are as follows: State of the economy Good Good Average Average Bad Bad EBIT (R) 300 000 300 000 160 000 160 000 20 000 20 000 Risk less rate (%) 3 5 5 7 7 9 Premium (%) Joint Probability 2 2 4 4 10 10 0.125 0.125 0.250 0.250 0.125 0.125 REQUIRED: (a) Calculate the expected value of the short-term interest rate. [5] (b) Calculate expected profit under each of the financial manager's three proposed financing plans (Ignore possible growth effects and assume an expected EBIT of R160 000 under each plan.) [6] (c) Determine the worst and best after-tax profit outcome which would result from each of the financing plans. Briefly interpret the results and recommend a financing plan for the company. Where applicable, use tabular formats to present your findings. [14] 2 FIN4801 2016 ASSIGNMENT 02 UNIQUE NUMBER: 581513 Due date: [50 marks] 16 SEPTEMBER 2016 QUESTION 1 [25 marks] Use the statement of financial position and statement of comprehensive income for Amolatina Ltd to answer the questions that follow. Assume all sales are on credit and 365 days for 2015. STATEMENT OF FINANCIAL POSITION FOR AMOLATINA LTD AS AT 31 DECEMBER 2015 Assets (R) Equity and liabilities Accounts payable Notes payable Other current liabilities (R) 15 000 000 21 000 000 10 000 000 Cash Marketable securities Accounts receivables Inventories 24 000 000 14 000 000 26 000 000 81 000 000 Total current assets 145 000 000 Total current liabilities 46 000 000 Non-current assets Less depreciation Net non-current assets 115 000 000 9 000 000 106 000 000 Total assets 251 000 000 Long-term debt Total liabilities Ordinary shares Retained earnings Total shareholders' equity Total liabilities and equity 25 000 000 71 000 000 80 000 000 100 000 000 180 000 000 251 000 000 STATEMENT OF COMPREHENSIVE INCOME FOR AMOLATINA LTD FOR YEAR ENDED 31 DECEMBER 2015 Net sales 410 000 000 Cost of goods sold 150 000 000 Gross profit 260 000 000 Selling expenses 24 000 000 Depreciation expense 5 000 000 EBIT 231 000 000 Interest expense 11 000 000 Net income before tax 220 000 000 Taxes (30%) 66 000 000 Net income 154 000 000 3 FIN4801 2016 Current ratio Debt/total assets Times interest earned Sales/Inventory Days' sale outstanding INDUSTRY AVERAGE RATIOS 3:1 Sales/fixed assets 25% Sales/total assets 5 times Net profit margin 8 times Return on assets 20 days Return on equity 4 times 5 times 6% 11% 13.5% REQUIRED (a) Calculate the Du Pont equation for Amolatina Ltd. [4] (b) Compare the Du Pont equation calculated in (a) with the composite equation for the whole industry. [6] (c) Briefly comment on a comparison between the Amolatina Ltd and industry with specific regard to liquidity, solvency and asset management. [5] 1.2 Study BRIDS Ltd's statement of financial position and statement of comprehensive income are given below: Statement of financial position for BRIDS Ltd as at 31 December 2015 R R Cash 75 000 Accounts payable 160 000 Accounts receivable 110 000 Notes payable 140 000 Inventory 450 000 Total current assets 635 000 Total current liabilities 300 000 Net Non-Current assets Total assets 465 000 Long-term (12%) 350 000 Ordinary shares equity (45 450 000 000 shares) 1 100 000 Total liabilities & equity 1 100 000 Statement of comprehensive Income for BRIDS Ltd for the year ended 31 December 2015 Sales 800 000 Cost of goods sold 310 000 Earnings before interest and tax (EBIT) 490 000 Interest expense 65 000 Earnings before tax (EBT) 425 000 Taxes (10%) 42 500 Net income 382 500 The industry average inventory turnover is 8 and the interest rate on the firm's longterm debt is 12%. 45 000 shares are outstanding. BRIDS Ltd plans to change its inventory methods so as to operate at the industry average inventory turnover ratio. The funds generated from this change will be used to retire long-term debt and it is assumed that the company's sales, the cost of goods sold, and the share price will remain constant. Assume that inventory turnover is given as a ratio of sales to inventory. 4 FIN4801 2016 REQUIRED Determine the percentage change in the BRIDS's return on equity (ROE) once these changes are effected. [10] QUESTION 2 [25 marks] Xola Ltd is evaluating the feasibility of introducing a new product. They would have to invest R300 000 at time t = 0 for the design and testing of the new product. Management believes that there is a probability of 80% that this phase will be successful and that the project will continue. If stage 1 is not successful the project will have to be abandoned with zero salvage value. The next stage, if undertaken, would consist of making moulds, and producing two prototypes. This would cost R2 500 000 at time t = 1. Production will commence if the tests are successful. The moulds and prototypes could be sold for R765 000 if the product fails the testing phase. Management estimates the probability of the product passing the testing phase as 90% and that phase 3 will then be undertaken. Phase 3 consists of converting the unused production line to produce the new design. This would cost R3 500 000. If the economy is strong at this point, the value of sales of the final product would be R16 000 000. If the economy is weak, the sales value of the final product would be R2 500 000. Both sales values occur at time t = 3, and each state of the economy has a probability of 0.5. The required return of Xola Ltd is 8%. The firm only accepts investments if the coefficient of variation of the proposed project is less than 5. REQUIRED (a) (b) (c) (d) Use a decision tree to determine the project's expected net present value (NPV). [10] Calculate the project's variance and standard deviation of the NPV. [7] Calculate the project's coefficient of variation (CV) of the NPV . [4] Should the project be accepted or rejected? Substantiate your answer [4] 5 FIN4801 2016 ASSIGNMENT 03: SELF-EVALUATION ASSIGNMENT [45 marks] Please note that this is a self-marking assignment; it should therefore not be submitted to the university for marking. After you have attempted the assignment, check your answers against the suggested solutions in Tutorial Letter 202. You will need to have a general overview of all the prescribed chapters in your textbook to complete this assignment successfully. QUESTION 1 [10marks] Suppose you manage a R4 million portfolio that consists of four stocks with the following investments. Stock A B C D Investment (R) 400 0000 600 000 1 000 000 2 000 000 Beta 1.5 -0.5 1.25 0.75 Required If the market's required rate of return is 14% and the risk free rate is 6%, what is the portfolio's required rate of return? [10] QUESTION 2 [5 marks] Assume asset A has an expected return of 10 per cent and a standard deviation of 20 per cent. Asset B has an expected return of 16 per cent and a standard deviation of 40 per cent. Required If the correlation between A and B is 0.35, what is the expected return and standard deviation for a portfolio comprised of 30 per cent asset A and 70 per cent asset B? [5] 6 FIN4801 2016 QUESTION 3 [8 marks] The earnings, dividends and stock price of FML Ltd are expected to grow at 7% per year in the future. FML Ltd's common stock sells for R23 per share, its last dividend was R2 per share and the company will pay a dividend of R2.14 per share at the end of the current year. Required (a) Calculate FML Ltd's cost of equity using the discounted cash flow approach. [5] (b) What would be the firm's cost of equity based on the CAPM approach if the firm's beta is 1.6, risk free rate is 9% and the expected return on the market is 13%? [3] QUESTION 4 [7 marks] Kay Ltd's current earnings per share (EPS) is R6.50. Five years ago, EPS was R4.42. The company pays out 40% of its earnings as dividends and the stock sells for R36. Required (a) Calculate the historical growth rate in earnings. (Hint: This is a 5-year growth period). [3] (b) Calculate the next expected dividend per share, D1. [Hint: D0 = 0.4(R6.50) = R2.60]. Assume that the past growth rate will continue. [2] (c) What is Kay Ltd's cost of equity? [2] QUESTION 5 [15marks] Dube Scientific Products produces satellite earth stations which sell for R100 000 each. The firm's fixed costs, F are R2 million. Fifty earth stations are produced and sold each year while profits total R500 000 and the firm's assets (all equity financed) are R5 million. The firm estimates that it can change its production process, adding R4 million to investment and R500 000 to fixed operating costs. This change will reduce variable costs per unit by R10 000 and, increase output by 20 units, but, the sales price on all units will have to be lowered to R95 000 to permit sales of the additional output. The firm has a tax loss carried forward, meaning that its taxes are zero. Its cost of equity is 15 per cent and it uses no debt. Required Evaluate whether this firm should make this change. 7 [15]