MAMB$2613[$Online$]$

Individual Assignment

Due dates: $31$ May $/7$ June $2024$

Instructions:

$1.$ Answer the questions in this MS Word file $($use this MS Word file as your $$Template$$ to answer the questions below.

$2.$ You are allowed to use MS Excel to obtain answers for questions $1\mathrm{.}3$ and $1\mathrm{.}4$ of this assignment.

$3.$ You are not allowed to use MS Excel to answer questions $1\mathrm{.}1$ and $1\mathrm{.}2($i$.$e$.$ typed answers with calculations are required$).$

$4.$ Excel inserts are just tools to obtain answers related to $-$ not answers on their own.

$5.$ Paste only the applicable Excel$-$based answers neatly onto this MS Word answer sheet as I prefer to mark the Word document.

$6.$ Any parts pasted in this MS Word file must not hav

$7.$ e sections that are not $$cut off$$ in the Word document. Make sure to paste neatly.

$8.$ Also submit your Excel file on BB$.$

$$ BML Ltd$.$ must evaluate the following two projects and decide which project to undertake during the second half of $2024.$ As a member of the financial management team, you are instructed to assist in the capital budgeting process by analysing the financial viability of both projects. So far, your team compiled the following projected cash flows for both projects:

Project $1$ is a $14-$year project with the following projected cash flows:

Year Cashflows Project $1$

$0$ Initial investment $-$R$15,330,000$

$1$ Net Operating cashflows $-$R$14,716,800$

$2$ Net Operating cashflows R$3,679,200$

$3$ Net Operating cashflows R$3,495,240$

$4$ Net Operating cashflows R$4,019,526$

$5$ Net Operating cashflows R$4,622,455$

$6$ Net Operating cashflows R$5,315,823$

$7$ Net Operating cashflows R$6,113,197$

$8$ Net Operating cashflows R$7,030,176$

$9$ Net Operating cashflows R$8,084,703$

$10$ Net Operating cashflows R$9,297,408$

$11$ Net Operating cashflows R$10,692,019$

$12$ Net Operating cashflows R$12,295,822$

$13$ Net Operating cashflows R$14,140,195$

$14$ Net Operating cashflows R$16,261,225$

Project $2$ is an $18-$year project with the following projected cash flows:

Year Cashflows Project $2$

$0$ Initial investment $-$R$9102188$

$1$ Net Operating cashflows $-$R$7463794$

$2$ Net Operating cashflows $-$R$6045673$

$3$ Net Operating cashflows $-$R$4292428$

$4$ Net Operating cashflows $-$R$2918851$

$5$ Net Operating cashflows R$5233758$

$6$ Net Operating cashflows R$5757134$

$7$ Net Operating cashflows R$6332847$

$8$ Net Operating cashflows R$6966132$

$9$ Net Operating cashflows R$7662745$

$10$ Net Operating cashflows R$8429019$

$11$ Net Operating cashflows R$9271921$

$12$ Net Operating cashflows R$10199113$

$13$ Net Operating cashflows R$11219025$

$14$ Net Operating cashflows R$12340927$

$15$ Net Operating cashflows R$13575020$

$16$ Net Operating cashflows R$14932522$

$17$ Net Operating cashflows R$16425774$

$18$ Net Operating cashflows R$18068351$

Both projects are expected to have a terminal cash flow equal to $4\mathrm{.}5\%$ of the initial investment. Terminal cash flows must still be added to the last projected cash flow.

$$ BML Ltd$.$ can only afford to undertake one of these projects and the funds required for the project will have to be obtained with long$-$term financing $($i$.$e$.,$ long$-$term loans, ordinary shares and preference shares$).$

$$ BML Ltd$.$ will maintain the current long$-$term capital structure weights $($based on book values of long$-$term capital sources in the June $2024$ balance sheet$)$ for the foreseeable future. Accordingly, the current book value weights must be used for WACC calculations.

$$ The ordinary share dividend history is as follows and can be used to estimate the cost of ordinary shares $($ks$)$ by using the Gordon constant$-$growth $($DDM$)$ model:

Dividend History

$20172018201920202021202220232024$

R$0\mathrm{.}04$ R$0\mathrm{.}04$ R$0\mathrm{.}05$ R$0\mathrm{.}06$ R$0\mathrm{.}06$ R$0\mathrm{.}07$ R$0\mathrm{.}08$ R$0\mathrm{.}08$

$$ BML Ltd$.$ has a Beta coefficient $(\backslash$beta $)$ of $1\mathrm{.}25.$ The current risk$-$free rate $($Rf$)$ is $7\mathrm{.}25\%$ and the expected market rate of return on all assets $($km$)$ is $13\mathrm{.}25\%.$ This information can be used to estimate the cost of ordinary shares $($ks$)$ by using the Capital Asset Pricing Model $($CAPM$).$

$$ The financial statements for the financial year ending $30$ June $2024$ are as follows:

Questions

$1\mathrm{.}1$ Calculate the percentage weight that the sources of long$-$term financing made up of total long$-$term financing during $2024$:

Capital Structure:

Sources of Financing $\%$ Weight of Long$-$term

Financing

Weight $2024$

$1$ Long$-$term Debentures $\_\_\_\%$

$2$ Long$-$term Bonds $\_\_\_\%$

$3$ Ordinary Shares and reserves $\_\_\_\%$

$4$ Preference Shares $\_\_\_\%$

Total long$-$term financing $100\%$

$(8$ marks$)$

$1\mathrm{.}2$ Use the weights in the previous question to calculate the WACC for BML Ltd as measured on $30$ June $2024.$ However, since two methods for calculating Ks can be used, you are required to calculate two WACC estimates. Call one estimate $$WACC$\_$CAPM$$ and the other estimate $$WACC$\_$DDM$.$ Make sure to calculate each part of the cost of capital in detail and to show how it was calculated. $(26$ marks$)$

$1\mathrm{.}3$ Evaluate the $2$ projects by using the following evaluation methods to determine which project is the best:

$1\mathrm{.}3\mathrm{.}1$ Payback period $(8$ marks$)$

$1\mathrm{.}3\mathrm{.}2$ Discounted payback peri