MAC 3702 Assignment 2: 2021 ONLY SUBMIT ONLINE, OTHERWISE, YOUR ASSIGNMENT WILL NOT BE MARKED QUESTION 1 (35 marks, 63 minutes) Tech-Sawy Limited (TSL) is a technology innovation company based in Cape Town. The company focuses on developing technological solutions which are key to making modern workers more productive. TSL is listed on the Johannesburg Stock Exchange and has several branches across the SADC region. During 2020 TSL identified several areas where blockchain technology can be used (use cases) in the health, property, education, supply chain and other sectors. Blockchain is a system of recording information in a way that makes it difficult or impossible to change, hack, or cheat the system. It is essentially a digital ledger of transactions that is duplicated and distributed across the entire network of computer systems on the blockchain. Any change made in the ledger has to be accepted by all the other users across the network, making it virtually impossible for fraudulent transactions to be effected. TSL has received support and interest from the government of South Africa by way of a grant from the Technology Innovation Agency, for the research and development of a pilot solution for the Department of Health for the recording of patient information. Following the success of the pilot project TSL has pitched the adoption of the blockchain technology to several potential users and received very positive feedback. TSL plans to set up a blockchain development unit in order to deliver on the blockchain revenue stream. The following information was sourced from the integrated annual report of TSL. Extract from the statement of financial position at 31 May 2021 Rand Equity and Liabilities Ordinary shares (80 cents each) 500 000 Retained income 720 000 Shareholders' capital and reserves 1 220 000 15% Preference shares (R100 each) 120 000 Long term loan FNB Bank (16,67%) 680 000 Total equity and liabilities 2 020 000 Additional information 1. Ordinary share dividends declared and paid in the previous five (5) years were as follows: Year Dividend per share 2017 72 cents 2018 80 cents 2019 91 cents 2020 95 cents 2021 105,2 cents The TSL Board intends to maintain the average growth in dividends. 2. The market price for ordinary shares is currently R12 per share and that of preference shares is R96 per share. New issues will have no effect on these prices, although ordinary share issue costs will be 4% per share issued. TSL aims to maintain a debt: equity ratio of 1: 1 going forward (based on book values). To service the new blockchain technology clients TSL is planning to buy new high tech coding infrastructure at a cost of R800 000 at the start of the new financial year. The company will use this infrastructure for 5 years and then scrap it for R50 000. 5. The following options are available to finance the new initiative: PS\" MAC 3702 Assignment 2: 2021 . New ordinary shares can be issued (retained earnings cannot be utilised). - A maximum of 4 000 additional 15% preference shares of R100 each can be issued. . A loan from Crypto Bank of R200 000 at prime + 800 basis points. a A top-up loan from FNB Bank of R50 000 at the same rate as the existing loan, which is considered to approximate the fair market interest rate. The loans can only be taken at the total amounts as made available by the banks. 6. The South African Income Tax Act stipulates a company tax rate of 28% and an allowance on new coding infrastructure of 20% per annum. The prime lending rate is currently 105% and is expected to stay unchanged for the foreseeable future. The required rate of return on preference shares is 11%. REQUIRED (a) Determine how the new coding infrastructure should be financed, considering the funding options available to TSL as well as the current capital structure on 31 May 2021 using book values. For this part, assume preference share are redeemable and therefore categorised as debt. (Calculations 10 marks; comments 2 marks) (12) (b) Calculate the weighted average cost of capital of TSL based on market values after the financing of the new project. For this part, assume preference shares are non- redeemable. [Round rand amounts to the nearest cent and other numbers to the nearest two decimal places] (13) (c) Assuming the information below determine how long (in years) it will take TSL to recover its initial capital investment in the new infrastructure using the discounted payback method. (5) Description Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 2021 2022 2023 2024 2025 2026 Net cash-flows (800 000) 491 200 491 200 491 200 491200 0 (d) Discuss qualitative factors that should be taken into account by the Board of TSL before deciding to buy the new coding infrastructure, as well as advantages for TSL of venturing into the development of Blockchain technology (5) QUESTION 1 TOTAL [35]