Question 1 [15]

Ocean Fishing Ltd financed a new fishing trawler with a long-term loan two years ago. The value of the long-term loan in the statement of financial position is recorded as R8 million. The loan carries an interest rate of 13% and the loan matures at the end of the loan period which is 8 years. The interest rate on current long-term loans is 17.15%.

The current tax rate is 30%.

The chief executive officer wants to know what the current market value of the longterm loan is.

Required:

Show all calculations and round off all answers to the closest rand. Use the information provided to determine the current value of the long-term loan.

Question 2 [37]

2.1. A colleague of yours is uncertain what the beta coefficient represents in the context of an investment portfolio consisting of shares. Explain to this colleague the meaning of the beta coefficient as it is used in the above context. (9)

2.2. An investor is thinking about investing in a portfolio consisting of 60% shares in Lycia Ltd and 40% shares in Trentco (Pty) Ltd. The investor collected the following information about these shares:

Investment scenarios Probability Expected return Lycia shares Expected return

Trentco shares Pessimistic 0.10 8.00% 12.00% Normal 0.60 16.00% 18.00%

Optimistic 0.30 19.00% 24.00%

From the information gathered, the investor calculated the following portfolio variables:

Lycia shares Trentco shares

Expected return 16.00% 19.00%

Standard deviation 3.00% 4.00%

The risk-free rate is 6%.

The market return is 15% and the market risk is 5%.

Required:

Show all calculations and round off all answers to two decimals.

2.2.1. Calculate the following portfolio variables:

(a) The covariance of returns of the portfolio (4)

(b) The correlation coefficient of the portfolio (4)

(c) Portfolio return (5)

(d) The standard deviation of the portfolio (8)

2.2.2. Use the results of your calculations above to demonstrate to the investor how investing in this two-share portfolio compares with other investments in the market and what the investor's decision should be. (7)