QUESTION 1 (30 MARKS) Sapitec Bank is South Africas fastest growing bank. They are focused on the middle to lower income groups. They strive to simplify banking and have developed an all-inclusive banking solution. What has made them prosper is that they ensure that they do whatever they can to make banking accessible to everyone. They have also reduced unnecessary paperwork which has resulted in a reduction of admin fees which allows them to pass on the cost-saving to the customer. Sapitec recently unveiled their 500th branch in Morning Glen. They then unveiled their plans to double the number of branches they have by 2028. This project will require significant capital over the period. After a capital budget was performed, the Financial Director wanted to make sure that the internal rate of return (IRR) of the project was indeed greater than the cost of capital. He has asked you to calculate the cost of capital. The following Statement of Financial Position and notes were made available to you: SAPIT EC BANK Statement of Financial Position As at 28 February 2022

2022

R'000

Fixed Assets 458,445

Cash and Cash Equivalents 2,841,918

Loans and Advances to clients 9,963,966

Other Current Assets 1,067,688

Total Assets 14,332,017

Equity and Liabilities

Ordinary Share Capital and Premium 1,918,677

Preference shares and Premium 258,969

Retained Earnings 1,272,867

3,450,513

Liabilities Bonds 1,455,600

Debentures 2,042,5000

Customer Deposits 6,844,283

Other Current Liabilities 539,121

10,881,504

Total Equity and Liabilities 14,332,017

Note 1

The share premium equated to R1,900,677,000. The shares have a par value of R1 per share. Sapitec shares were trading at R168 at the close of business on 28 February 2022.

Note 2

11% preference shares were issued at a par value of R10. The preference shares are cumulative, non-redeemable preference shares. Sapitec has 500,000,000 authorised preference shares and 200,000,000 issued preference shares. Preference shares were trading at R9 per share at the close of business on 28 February 2022.

Note 3

The bonds were issued with the following terms: 9.6% bonds were issued at par with a semi-annual coupon payment. The bonds will be redeemed in 5 years time at a premium of 5% of the nominal value. Management could not determine the market related yield of the bonds, so they decided to benchmark the rate to the riskfree rate to be used. The Financial Director was happy to use a before tax premium of 2.5% on the risk-free rate to represent the market related interest on the bonds.

Note 4

8% Debentures were issued to selected lenders on 28 February 2022. This was because special repayment terms were negotiated with the particular lenders as not everyone was happy with the repayment terms proposed. The repayment terms have been agreed on as follows:

The debenture will be settled in 5 years time

The par value of R2,150,000 will be paid back at a premium of 40% at the end of the 5 year term. The debentures were issued at a discount of 5% of the par value.

Additional information:

The company tax rate is 28% The Financial Director searched the Reserve Bank website and found the following information for retail government bonds:

Name Coupon Market Yield Maturity

R158 5.93% 6.71% 15 September 2025

R203 7.65% 8.42% 15 September 2028

When the head of the Monetary Policy Committee (MPC) and Governor of the Reserve Bank announced that interestrates were going to remain stable at the last MPC meeting, the returns of the market increased by 2% and the returns of Sapitec Bank increased by only 1.7%. The market risk premium as per recent study was 6.2%.

REQUIRED: Calculate the weighted average cost of capital of Sapitec Bank as at 1 March 2022 by using market values. Show all calculations.