Question 1 (20 marks)

On 19 February 2024, you went to the Milken-Motsepe Power Networking cocktail where the finalists were presenting and demonstrating their renewable and sustainable energy products. You were so impressed by the demonstration of a solar-powered tractor (aftrak) developed by Tiyeni in Malawi and Loughborough University in the UK such that you paid $3.6 million for the rights to the product. You are now analysing whether you should start producing the tractor, and have collected the following information: The equipment needed to manufacture the tractor will cost $10.8 million, and it can be depreciated straight line over a 5-year life time to a salvage value of $1.8 million. You will be using a building that you currently own, but rent out, as the facility to house the equipment. You will have to obviously evict the current tenants, who pay you $1.08 million a year in rent. This building is being depreciated straight line, and is yielding $360,000 in depreciation each year. You expect to sell 5,000 tractors a year at $5,000 a tractor. The raw materials and labour associated with producing each tractor will be $3,000. You expect to spend $3.6 million a year producing TV infomercials to promote your product. You will need to produce and maintain an inventory, equal to three months of sales, to meet demand. (This will have to occur before you sell any units.) Your tax rate is 30% and you estimate your discount rate to be 14%.

a) Estimate the opportunity cost of the rental building that will be used for the facilities. (4 marks)

b) Estimate the net present value of the project. (16 marks)

Question 2 (20 marks)

ABC Corporation, a company that is involved in multiple construction projects all over Africa, reported EBITDA of 1290 million in 2023, prior to interest expenses of 215 million and depreciation charges of 400 million. Capital Expenditures in 2023 amounted to 450 million, and working capital was 7% of revenues (which were 13,500 million). The firm had debt outstanding of 3.068 billion (in book value terms), trading at a market value of 3.2 billion, and yielding a pre-tax interest rate of 10%. There were 62 million shares outstanding, trading at 64 per share, and the most recent beta is 1.10. The tax rate for the firm is 28%. (The Government bond rate is 7.5% and the market risk premium is 7%.) The firm expects revenues, earnings, capital expenditures and depreciation to grow at 9.5% a year from 2024 to 2028, after which the growth rate is expected to drop to 4%. (Capital spending will offset depreciation in the steady state period.) The company also plans to lower its debt/equity ratio to 50% for the steady state (which will result in the pre-tax interest rate dropping to 9%.)

a) Estimate the cost of capital for the forecast horizon and the steady state period. (8 marks)

b) Estimate the value of the firm. (8 marks)

c)Estimate the value of the equity in the firm and the value per share. (4 marks)